Solving the regional and global trade jigsaw puzzles

By Jayant Menon on Thu, 05 June 2014

The rise of mega-regionals such as the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) suggest that the world trade system is fragmenting to appear more like a jigsaw puzzle than a spaghetti bowl. How do we resolve the growing mess?

One approach is to consolidate bilateral free trade agreements (FTAs) into regional blocs, a process similar to solving a regional jigsaw puzzle, and then link them up globally. But both regional and global jigsaw puzzles need to be solved, and in that order, if this route is to work. But can it?

The short answer is no. The longer answer starts with the challenges posed by solving the regional jigsaw puzzle followed by the global one, before we consider an alternative way forward.

RCEP is a useful example to illustrate the regional puzzle. Like any jigsaw puzzle, we begin with disarray. But the RCEP puzzle is more than just messy —there is no solution because the pieces do not fit. The so-called pieces —the ASEAN+1 and bilateral FTAs— come in different shapes and sizes. The only way to make the pieces fit is to reshape them: either to shave them down or to build them up.
 
Shaving down the bits can be thought of as a “race to the bottom,” where the lowest common denominator rules, making for an easier fit. Building them up is the opposite, where laggards lift their reform game to meet the standard set by the front-runner(s). The only example of successful consolidation is the EU. In all likelihood, RCEP will emerge after a shave down given the difficulties involved and the lack of political will to overcome them.

Despite the difficulties, assume that RCEP and the other mega-regionals are concluded as intended. If this is the best case scenario, what does success look like? Not good, unfortunately —it has merely replaced the mess at the regional level with one at the global level.

To resolve the mess, how should the process of global consolidation occur?  Should it proceed sequentially, or through a single undertaking where the blocs come together to negotiate a comprehensive deal? The former faces the same difficulties as regional consolidation, but is amplified by greater diversity, while the latter, like Doha, is currently improbable with a wide-ranging agenda. For these reasons, cross-regional link-ups of mega blocs have no precedent.

In this environment, a way forward is to return to the most widely used modality of trade liberalization —unilateral actions— but this time involving the multilateralization of preferences, rather than unreciprocated reductions in tariffs. In Asia, more than three quarters of imports of most of the RCEP countries are already covered or about to be covered by an FTA. Therefore, there is little point in holding out to negotiate reciprocity with the countries accounting for the remaining small amount of trade.
 
Further, the benefits from reciprocity fall short of multilateralization when preference utilization is as low as it is in Asia. Political economy-wise, the resistance from FTA partners toward multilateralization decreases as the number of FTAs increase, due to preference erosion.
 
While multilateralization is easily applied to tariffs, it is also naturally suited to non-tariff barriers (NTBs) and difficult sectors such as services. The removal of many NTBs share public good characteristics. Unlike tariffs, it is either costly or impractical to remove NTBs in a select manner.
 
Similarly, if services liberalization is pursued through harmonization of standards or regulatory convergence, rather than mutual recognition arrangements, non-members can easily accede later. Therefore, multilateralization of preferences, whether tariff or non-tariff, would address the disarray in the world trade system.