Japan's Prime Minister Shinzo Abe shakes hands with US President Donald Trump after signing a joint statement on trade during a bilateral meeting on the sidelines of the 74th session of the United Nations General Assembly (UNGA) in New York City, New York, US, September 25, 2019. REUTERS/Jonathan Ernst
On the margins of the United Nations General Assembly (UNGA)
meetings several weeks ago, US President Donald J. Trump and Japanese Prime
Minister Shinzo Abe announced the conclusion of a much-anticipated new trade
agreement. This deal, described by the two countries and commentators as an
interim agreement, provides for a limited number of tariff concessions—mostly
agriculture products for US exports and a range of industrial and agriculture
products for Japanese exports—and a framework of agreed commitments on digital
trade issues. The agreement attracted significant attention—after all, it is
now the default outcome after the Trump administration abandoned the
Trans-Pacific Partnership (TPP), which included a much broader and deeper set
of commitments between the United States and Japan. And while several analysts
highlighted questions about whether
it might comply with standards set out in the World Trade Organization
(WTO), their comments were generally drowned out by analysis
of the benefits to US farmers, implications for trade in autos, and a Trump
trade win in the context of the 2020 US presidential election.
In fact, a more central question—and challenge—might be what
this agreement means for the future of the multilateral trading system. The WTO
has been taking multiple hits since the arrival of the Trump administration, including
dismissive comments by the US president about how the WTO has served US
interests and the current crisis over the continued viability of the Appellate
Body. However, now there is a new threat that is potentially more existential,
even if it plays out in a slow-drip fashion. If the United States were to
complete additional tariff-cutting deals with such limited scope and other
countries were to follow this model in their bilateral trade negotiations, the
WTO might confront a gradual erosion of one its central tenets—most favored
nation, or “MFN,” treatment.
The multilateral trading system, put into place in 1947 and
now embodied in the WTO since 1995, is built on a foundation of equal treatment
among member countries. The origins of MFN in trade go back centuries, and the
principle is underpinned by compelling economic and political considerations.
From an economic standpoint, MFN promotes uninhibited trade that can lead to
optimum efficiency outcomes. In theory, the global economy will grow more, to
the benefit of all, than would be the case with strictly bilateral,
preferential trade relationships. From a political standpoint, MFN, as
institutionalized multilaterally with the creation of the post-World War II
trading system, promotes mutual trust and shared commitment among all members
who abide by the rules of the system.
Under WTO rules, there can be only very limited exceptions
to MFN. One form is through waivers, which require a consensus of all members
and is generally limited to unique exceptions, such as US legislation that
provides benefits to sub-Saharan African nations and to Nepal since it suffered
a devastating earthquake. A second form is through programs that are designed
to benefit all developing countries (so-called Generalized System of
Preferences or “GSP.”) A third form is for bilateral or regional free trade
agreements (FTAs) and customs unions. Customs unions are relatively few in
number, such as that which is part of the European Union. FTAs, however, have
become much more common over the last two decades and have aroused concerns
that their proliferation is a threat to multilateralism in trade.
What keeps the overall quantity of FTA exceptions to the
WTO’s MFN rules in check is the requirement, set forth in Article XXIV of the
WTO’s core agreement on trade in goods, that an FTA cover “substantially all
trade” between countries that are part of that agreement. While this
requirement means that a qualifying agreement must provide tariff-free trade
for virtually all trade between these countries, which in itself erodes MFN
treatment globally, it makes it much more difficult for countries to negotiate
and conclude such comprehensive agreements.
If now the United States and others following in its
footsteps begin to negotiate agreements that cut tariffs between them on a
significantly smaller scope of products, these agreements that are exceptions
to the rule could become much easier to conclude. This scenario might
eventually lead to an MFN system shot through with exceptions to this core
principle of multilateralism on trade. With so many holes—large and small—to
its original blanket coverage of equal treatment among all, it is highly
probable that someday there will be virtually no such equality under the system
that remains.
Some may argue that MFN will still exist in application of
trade rules beyond tariffs, such as regulatory measures that affect trade, but
once the restraint that has applied for tariffs no longer exists, what
compunction might countries have to maintain it beyond tariffs? Others may
argue good riddance—the existing system has not allowed for reciprocity in
trade, and it is time for reciprocity to be the new core principle in global
trade relationships. Generally, however, economic stakeholders—producers,
exporters, and importers in all countries—prefer limited deviations from the
norm in national tariff schedules. The greater the complexity of a tariff
schedule, the greater the confusion and instability experienced by companies,
large and small, in all countries.
The central point here is that the multilateral trading
system is facing threats across multiple fronts, and it is essential that its
defenders fully understand the magnitude of such threats and find ways to
overcome them if the system is to continue to be relevant to global trade for
the foreseeable future. There are any
number of ways to fight back—pursuing dispute settlement challenges against
measures and agreements that violate its rules; finding new approaches for
negotiating new rules, as many have already sought to do since the demise of
the ill-fated Doha Round of negotiations; ensuring that bad examples are called
out and efforts are made to dissuade others from following them. However,
hand-wringing and hollow public statements that bemoan the situation will not
be effective in altering the reckless course that some WTO members have been
following. Those who wish to protect and extend the multilateral trading system
will need to be bold in responding with action and creative in generating ideas
to update it. Otherwise, they will be forced to simply adapt to a world in
which the multilateral trading system slowly erodes away and eventually goes
the way of the dodo.
Mark Linscott is a senior fellow with the Atlantic Council’s South Asia Center. He served as the assistant US trade representative (USTR) for South and Central Asian Affairs from December 2016 to December 2018. He previously served as the assistant US Trade Representative for WTO and Multilateral Affairs from 2012 to 2016 with responsibility for coordinating US trade policies in the WTO.
Further reading
Wed, Oct 2, 2019
“Engaging in serious negotiations to solve the problem on both sides is much more sensible than going for immediate tariffs and triggering a tit-for tat,” Antonio de Lecea said.
New Atlanticist
by
David A. Wemer
Thu, Oct 3, 2019
There was no more auspicious a moment for creating an historic precedent on trade between the two countries—as limited as it was likely to be. We can only hope that the momentum for a deal has not entirely slipped away
New Atlanticist
by
Mark Linscott
Fri, Jun 14, 2019
The World Trade Organization (WTO), the largest multilateral trade organization and the foundation of the global trading system, has increasingly drawn the ire of the United States and other countries that view the organization as outdated and complacent as other countries skirt the rules to get ahead.
New Atlanticist
by
David A. Wemer
If the United States were to complete additional tariff-cutting deals with such limited scope and other countries were to follow this model in their bilateral trade negotiations, the WTO might confront a gradual erosion of one its central tenets—most favored nation, or “MFN,” treatment.
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