The spaghetti bowl of preferential trade agreements and the declining relevance of the WTO.

Author:Kloewer, Brad
 
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  1. INTRODUCTION

    The renowned economist and prolific scholar Jagdish Bhagwati once famously referred to the variety of preferential trade agreements ("PTAs") in the world as a "spaghetti bowl" phenomenon, wherein the diversity of trade arrangements between nations and regions makes for a confusing and convoluted mess. (1) The metaphor is apt, he argued, because the increasingly fragmented nature of these varying accords means each transaction must be traced from its origin through a twisting maze of diverse regimes before ever arriving at its destination. (2) These arrangements are difficult for even seasoned practitioners to untangle, and doubly so for the lay observer.

    The confusion these agreements provoke is no surprise, especially when one considers that this multiplicity of norms was precisely what the World Trade Organization ("WTO") was ostensibly designed to avert. Of course the WTO is an extremely complicated institution, but the order it espouses is fundamentally premised on two basic principles: National Treatment and Most Favored Nation. (3) The principle of national treatment is essentially a requirement that imports be treated the same as domestically produced goods, whereas the most favored nation principle requires that all trade benefits offered from one nation to another must be similarly extended to all other nations. (4) These principles, in turn, are premised on the widely accepted belief that liberalizing trade and reducing barriers such as tariffs leads to benefits for everyone involved. (5) Preferential trade agreements ("PTAs"), however, obviously confer additional benefits: benefits that exceed those offered to every other "most favored nation." As a result, these agreements essentially amount to more-than-most or even most-most favored treatment.

    The Marrakech Agreement, (6) which created the WTO in 1995 and subsumed the General Agreement on Tariffs and Trade ("GATT") (7) as well as the General Agreement on Trade in Services ("GATS"), (8) allows for the creation of PTAs given that certain conditions are met. These provisions are intended to prevent an unwieldy diversity of international trade norms, but, as will be more thoroughly discussed below, scholars from around the world have seriously questioned their effectiveness. In fact, an incredible and unprecedented proliferation of PTAs has been proceeding almost unabated since the inception of the WTO, leading to a substantial number of these agreements having been reported to the WTO by 2014. (9)

    In his often-cited commentary of the subject from nearly two decades ago, Professor Bhagwati warned that if the proliferation of PTAs continued, "it is likely that the dilution of the multilateral trading regime by the spaghetti bowl of preferential trade agreements will be our fate." (10) With the benefit of nearly twenty years of hindsight, can we yet determine if he was right? This paper will contend not only that Professor Bhagwati's prescience was well-founded, but moreover that the proliferation of PTAs was an inevitable course of action for a world not yet willing or able to accept a global system of homogenous norms.

    Part Two will establish some context by looking at the requirements of Article XXIV of the GATT, the Enabling Clause, and the surprising but telling paucity of WTO Appellate Body jurisprudence on the topic. Part Three will highlight and address some of the most prominent factors that may lead a country or region to engage in PTAs despite the WTO's more comprehensive umbrella. Part Four will look at specific examples of global realities in existence today and explain how these circumstances are demonstrative of a world order that isn't ready or able to submit to a trade regime governed by the standards of the WTO.

  2. GATT AND PTAS

    Despite their undeniable departure from the Most Favored Nation principle, and the trade distorting effects that result, different provisions of the GATT do in fact permit the formation of PTAs. The Enabling Clause, for example, allows for deviations from the Most Favored Nation principle for "[r]egional or global arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs." (11) This provision obviously applies only to agreements between developing countries, however, so the far more common mechanism under which these arrangements are allowed is Article XXIV, which lays out the criteria for three different allowable types of PTAs: customs unions, free trade agreements ("FTAs"), and interim agreements. (12)

    1. Article XXIV

      The substantive portions of Article XXIV are found in paragraphs 5 through 9. As a preliminary matter, Paragraph 5 emphasizes that while GATT rules do not prevent the creation of PTAs, they do limit the manner in which they can function. (13) More specifically, the formation of a PTA cannot justify an increase in any sort of barriers to trade--notably tariffs--to states not party to the PTA. (14) That is, PTAs can only function to reduce barriers to trade between the states that engage in them. They cannot act as a wall to shut out the rest of the world. Paragraph 6 requires that if a state does embark on a PTA that leads to duties or tariffs increasing for any bound tariff item, that state must formulate some means of compensation in line with the requirements of GATT Article XXVIII. (15) Paragraph 7 requires WTO members to notify the WTO whenever they intend to join a PTA, and further stipulates that those agreements must be reviewed to ensure that they do not violate other provisions of the GATT. (16)

      Paragraph 8 is especially important because it explains the different types of PTAs and establishes rules for their implementation. Paragraph 8(a) deals with customs unions and requires that within a custom union, barriers to trade must be eliminated for "substantially all trade" taking place between its members. (17) For trade taking place outside a custom union, however, members must maintain "substantially" uniform regulations with respect to all third parties. (18) A custom union also must not result in higher tariffs for the group than existed before. (19) Equally relevant to this discussion is paragraph 8(b), which address FTAs. (20) Here the requirements are very similar. Within the FTA, barriers to trade must be eliminated for "substantially all trade" between members, and the FTA must not result in an increase in barriers to third parties. (21)

    2. WTO Jurisprudence on Article XXIV

      The dizzying proliferation of PTAs has continued unabated for over two decades. In 1990, the GATT had only received notification of forty regional trade agreements ("RTAs") then in existence. (22) By June of 2014, however, that number had skyrocketed to 585. (23) In addition, bilateral investment treaties, which typically grant preferential treatment between only two states, have similarly seen an unprecedented growth in popularity, with more than 2,265 having been signed since 1989. (24) FTAs too have become increasingly common in recent years, with every WTO member (with the exception of Mongolia) being party to at least one FTA, and with the average WTO member being party to thirteen such agreements. (25)

      With all this expansion, one would expect the WTO Dispute Settlement Body to have produced volumes of commentary on the proper interpretation of Article XXIV. In reality, the Appellate Body has had remarkably little to say on the topic. Despite the explosion of PTA formation around the world, the Appellate Body has never directly interpreted one of the most fundamental elements of Article XXIV--the meaning of the "substantially all" requirement (26)--nor has there ever been consensus as to whether this term should be understood as a percentage or as something else. (27)

      The leading case dealing with Article XXIV at the WTO is Turkey--Textiles, wherein Turkey sought to impose a quota on imports of Indian textiles in order to join a customs union with the European Communities. (28) Turkey had ostensibly imposed the quotas in order to prevent Indian textiles that had been imported into Turkey from then being immediately shipped onward into Europe, which would violate the European Communities' more restrictive quotas on Indian imports. (29) Without addressing the more pressing questions regarding the ways in which Custom Unions...

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