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European Affairs
The World Trade System after Cancun
The World Trade Crisis Is Boosting Regional Agreements
By Rubens Barbosa
A number of developments in recent months, including the failed WTO ministerial meeting in Cancun, have led to a near crisis in the multilateral trade system – much to the regret of Brazil, which thinks that the system should be strengthened to avoid nondiscriminatory trade agreements. Recently, however, we have seen renewed hopes with the proposal by U.S. Trade Representative Robert Zoellick containing ideas on how to achieve progress during 2004 on the Doha Development Agenda. Brazil, as a member of the G-20 and the Cairns Group, welcomes this initiative.
Brazil’s growing concerns in the WTO cover a wide range of issues, including the operation of the disputes settlement mechanism, the enforcement of decisions by WTO panels, unilateral actions by the major players and the whole question of the organization’s decision–making process. The accession to the WTO of a growing number of new members, especially developing countries, is altering the dynamics of the negotiating process as well as the functioning of the organization itself.
To these difficulties must be added frustration among developing countries with the results of the Uruguay Round and with the lack of progress in addressing their concerns two years after the launch of the Doha Development Agenda. There is widespread dismay that after 60 years of trade negotiations in Geneva, in the WTO and in its predecessor the GATT, agriculture is still not treated in the same way as industrial products and services. Brazil is also concerned by the failure to deal adequately with investment issues.
All these problems, and many more, have led to a proliferation of bilateral and regional Free Trade Agreements (FTAs). This is now a worldwide trend. This development calls into question Article XXIV of the GATT and Article V of the GATS, which set the conditions for approving FTAs, and establishes guidelines and practices acceptable for their completion that are not necessarily consistent with the multilateral disciplines in the WTO, especially the Most Favored Nation principle. By May 2003, there were nearly 300 FTAs in the world, of which 238 were reported to the WTO and 46 were still under negotiation, according to one estimate. The number is almost certainly greater by now.
What are the benefits of these FTAs? First, they have a positive effect since trade negotiations bilaterally or within a small group of countries still keep up the overall momentum of trade liberalization. Another useful aspect is that such negotiations serve as an education for many countries on the complexities of trade reforms and implementation problems. They also lock in domestic reforms and strengthen trade relationships between countries.
In the Southern Cone Common Market (Mercosur), there was an enormous increase in trade among the four founding members, Argentina, Brazil, Uruguay and Paraguay, before they were hit by economic crisis at the beginning of this decade. FTAs also create conditions for strengthening political ties among the member countries, and, as in Mercosur, they have broader positive political implications for promoting peace and democracy.
What are the drawbacks? The first and perhaps most important drawback is the diversion of trade and investment. After the North American Free Trade Agreement (NAFTA) was created, for example, Brazil suffered from a significant diversion of trade and investment due to this preferential area. A second problem is the overlapping of jurisdiction and legal obligations when countries belong to bilateral or regional as well as to multilateral trade agreements.
A third disadvantage from the point of view of developing countries, and especially Brazil, is that FTAs create precedents and benchmarks of behavior that are not necessarily consistent with WTO regulations. U.S. bilateral agreements, for instance, with Chile, Singapore and Jordan, include rules that go beyond WTO requirements. In some cases, on the contrary, FTAs even take away WTO rights or preserve pockets of high protection.
So there are positive and negative elements of FTAs. Compared to some of the other agreements that have been negotiated around the world, I believe that the agreements in which Brazil has participated have had more positive than negative effects. Although they include some of the negative aspects common to all FTAs, they have gone in the right overall direction of trade liberalization.
Given the difficulties that the multilateral trade system is facing, the trend is definitely in favor of FTAs. In Asia, for instance, Japan has changed its long–time policy of preferring multilateral agreements, and is beginning to consider negotiating free trade areas with neighbors, including China. In fact, the whole of Asia is now embarking on conversations leading to FTAs. This is an important change. If the difficulties in the multilateral trade system continue, we shall have trade negotiations with variable geometry, different timing and different perspectives.
Developing countries think that these FTAs will include their interests, which will be a positive element for them. To advance multilateral trade negotiations and counter this trend toward limited agreements, we shall need an important package of reforms in the WTO, including especially agriculture. But at this stage, and until we reach meaningful results in the Doha Development Agenda, FTAs will be the best way to move in the direction of trade liberalization.
For our part, in Brazil we are pursuing a trade strategy in all three areas: bilateral, regional and multilateral. Our top priority is to strengthen the multilateral WTO trading system, but we recognize the problems that we face. We favor resuming negotiations in the Doha round as soon as possible, without preconditions. We recognize the difficulties of the decisionmaking process, which we have to look into, but we would like everybody, and particularly the United States and the European Union, to engage in serious, constructive negotiations. In the regional area, we are actively pursuing negotiations for a Free Trade Area of the Americas (FTAA), and we hope that we can find common ground to advance the discussions in a balanced and pragmatic way. We are also giving top priority to re–launching and strengthening Mercosur, not only in the area of trade but in all other areas, too.
We are also negotiating with the European Union, and hope to advance toward a Mercosur–EU agreement. We are in the final stages of an agreement with the Andean countries, and Peru is joining Mercosur as an associate member, like Chile and Bolivia. So we are very active in regional trade negotiations. At the bilateral level, Brazil and Mercosur have also negotiated a framework agreement with South Africa, and we are beginning to discuss agreements with India and China. By keeping active in all three areas, we are doing our best to advance in the general direction of greater trade liberalization.
Rubens Barbosa is the Ambassador of Brazil to the United States. He has served as Ambassador to Britain; Vice President of the Permanent Committee on Foreign Trade, Ministry of External Relations; Coordinator of the Brazilian Section for Mercosur – the Southern Cone Common Market; and Under–Secretary–General for Regional Integration, Economic Affairs and Foreign Trade at the Ministry of External Relations.