Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2006 : III. Routes for Asia's Trade
The rise of bilateralismFrustration with the slow and halting speed of multilateral trade negotiations conducted under the auspices of WTO has been one factor that has led impatient trading partners to consider liberalizing trade on a reciprocal basis. The limited mandates and explicitly mercantilist negotiating modalities in WTO, which have threatened Doha liberalization ambitions (Part I), have also encouraged some countries to look to bilateral opportunities for liberalization that serve their interests. It is readily apparent from the proliferation of new bilateral agreements since the completion of the Uruguay Round that negotiations between two or several parties are simpler and can go farther more quickly than can negotiations involving all 149 members of WTO. The advantage of bilateralism over multilateralism lies in its speed and scope. Viewed from a strategic perspective, bilateral agreements allow "like-minded" countries to make more progress on a wider range of issues in a shorter period of time than is possible in the diverse and complex WTO environment. For this reason, some countries that had long shunned a bilateral approach are now actively pursuing bilateralism as a competitive strategy for broad-based trade liberalization. 
But the "rules of origin" that delimit free trade in bilateral agreements are inherently discriminatory. They put third parties, which do not qualify under the rules of origin, at a disadvantage. In Asia, bilateral deals, which emphasize closed reciprocity rather than the "open regionalism" espoused in the past, are now on a strong upswing. Bilateral PTAs (a form of FTAs) are being negotiated with increasing frequency by developing Asian countries—particularly India, Korea, Pakistan, Singapore, and Thailand. The proliferation of bilateral agreements is a very recent phenomenon in developing Asia. Before 1995, only three of them involved developing member countries (DMCs) of the Asian Development Bank as notified to WTO. By 2005, over 27 agreements had been notified, with a much bigger number of other agreements in negotiation or under consideration. Tables 3.2 and 3.3 chart the proliferation of preferential trade (and economic cooperation) agreements involving Asian developing countries. Table 3.2 presents a list of those agreements that have been notified to WTO. A total of 36 agreements have now been formally notified and appear on the WTO regional trade agreements gateway (available through www.wto.org). These agreements range from minimalist agreements that simply exchange partial tariff preferences or extend tariff concessions from more to less developed countries to "full-blown" FTAs that go well beyond agreements on tariff reductions. From Table 3.2, it can be seen that full-blown FTAs are becoming increasingly common. It also can be seen that agreements notified under the enabling clause (between developing countries) tend to be less comprehensive than agreements notified under GATT Article XXIV. In recent years, full-blown FTAs tend to extend coverage to services, which must be notified separately under GATS Article V. An attempt is made to classify agreements as "shallow" or "deep" integration and according to whether the agreements go beyond countries' WTO commitments. (That is, are they "WTO+", including, for example, investment or environmental clauses?) Table 3.3 goes beyond Table 3.2 by identifying new agreements that have been signed and/or have already entered into force but have not yet been notified to WTO. This greatly expands the list. Table 3.3 documents 46 non-notified agreements that have been agreed by at least one DMC and a further 42 that are being negotiated (and suggests a potential avalanche of such agreements in years to come). In addition, at least another 55 potential new agreements are being studied or have ongoing consultations (but not formal negotiations). As the tables show, many of the new agreements that developing Asian countries are pursuing are with countries outside the region. These agreements may be referred to as "cross-regional agreements." Asia's emerging giants, the PRC and India, are also seeking to link up in some way. The fact that many of the new PTAs extend beyond the Asian region itself underscores the importance for Asian trade, and particularly for the export of final products, of markets external to the region. These cross-regional agreements are driven by a variety of concerns such as energy security, access to minerals and other natural resources, and efforts by countries to "lock in" reforms by making them part of a formal trade treaty with a major developed country or region. Many of these agreements are politically motivated, as countries seek to cement diplomatic alliances by providing economic benefits to partners. Hence, the new tendency toward PTAs involving developing Asia cannot readily be construed as an intention to create an Asian trade bloc to compete with the EU or North America. In large measure, the mushrooming of bilateralism globally—some measures suggest that about 300 bilateral agreements may be in force by the end of 2006—is being driven by a race for competitive advantage. The conclusion of a bilateral FTAs between two trading partners can often act as a strong incentive for third countries interested in protecting their market shares to negotiate similar agreements. The upshot is an uncoordinated and crisscrossing set of agreements that carry with them substantial costs and risks (Sutherland 2004). Those countries that are first movers or that enjoy strong bargaining power on account of their size, may gain, but other countries, many of them poor developing countries, risk losing. The burgeoning number of bilateral agreements globally has the potential to add greatly to the complexity of international trade and to the potential costs of trade. For example, instead of simply choosing locations that minimize costs, firms must now factor into their investment calculations the trade-off between tariff preferences made available through direct investment and the preferences they can receive by contracting out to local suppliers under multiple rules of origin. Customs administration can also become complex quickly, and opportunities for corruption and malfeasance expand, when there are overlapping and inconsistent rules of origin. 
To avert such problems, "harmonization" of the rules of origin in the context of regional trade agreements has been suggested. At a multilateral level, the "harmonization" program in nonpreferential rules of origin at WTO has dragged on for more than 10 years and is still not close to being realized. There is little hope that rules of origin in preferential agreements will ever be harmonized between the major hub-and-spoke systems.8 Even if the hub countries could agree in principle, the special interests created within industry and trade unions would produce formidable political opposition to such an exercise in rationality. An alternative might be to pursue "harmonization" under the auspices of regional agreements where a regional hub, such as the EU, has an FTA with spoke countries such as those on the Mediterranean rim and members of the African, Caribbean, and Pacific (ACP) grouping. But in practice, under this approach, the hub typically designs product-specific rules of origin to suit its own domestic interests. Consequently, different hubs are likely to have different rules. For example, in EU rules of origin pertaining to textiles and clothing, a "double-transformation" rule applies. Given the absence of capacity to spin yarn and to knit and weave fabric in most of the spoke countries, this rule in effect requires spoke countries to use fabric originating in the hub (i.e., the EU) in their clothing exports to qualify for preferential tariff treatment. In the Americas, the US hub requires an even more stringent rule than in Europe. The US imposed a "triple-transformation" rule, which goes so far as to require the spoke countries (Mexico, Peru, etc.) to use yarn produced by the hub; fabric that is spun, knit, or woven from such originating yarn; and to cut and sew the originating clothing parts into the final product to receive preferential tariff treatment. In addition, very specific value-added rules exist for "sensitive" products that are custom designed for the interests of the industries in question. Not only are the rules product specific, but the interpretation of accounting procedures is also idiosyncratic to each hub. In practice, rules of origin are not simply a technical issue but, in a very real sense, are viewed by interest groups as a useful, indeed, indispensable instrument of commercial policy (James 2005b, Vermulst and Waer 1990). Beyond the issue of rules of origin, the structure of bilateral agreements needs careful consideration. Potentially, PTAs that subsume and go beyond the WTO agreements and disciplines are likely to do least damage in terms of trade diversion. But the development of a parallel structure of bilateral trade agreements with different rules and different coverage from WTO may also put the entire multilateral system at risk. The possible costs of bilateralism will be considered in the following section, through simulation experiments that compare and contrast the gains from multilateral, regional, and bilateral trade liberalization scenarios.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Back