PTA proponents point to the complementarily of most favoured nation (MFN)
and PTA tariff cutting during this recent period of profusion of PTAs as
evidence of their ‘building blocks’ argument. Multilateralists point to the
welfare losses that accrue from trade diversion, the embedded trade
discrimination against third parties that is woven into such
agreements, as well as the damage inflicted over time to the multilateral
system by the incremental downgrading of the MFN principle.
Both parties concede that
large regional PTAs, such as the Trans-Pacific Partnership (TPP) agreement, the
Trans-Atlantic Trade and Investment Partnership (TTIP) agreement and the
Regional Comprehensive Economic Partnership agreement could serve as ‘building
blocks’ so long as they broad-based, add new members, and impose liberalising
disciplines on the multiple systems of rules of origin and related measures
that discriminate between insiders and outsiders.
Judging by the setback at
the recent TPP ministerial in Maui in late July, the US-led negotiation appears
to be failing this test. Worse, the trade discrimination embedded within the
existing TPP membership as a result of prior PTAs — the North American Free
Trade Agreement (NAFTA) foremost — appears to ironically be the biggest
‘stumbling block’ to concluding the TPP negotiations.
Trade economists have long
fretted about the lack of an explicit methodology and therefore a means of enforcement in
the GATT/WTO rules, which are meant to discipline instances of discrimination
suffered by third parties due to PTAs. As a result, such agreements regularly
violate, by way of their design of rules of origin and reallocation of tariff
rate quotas (TRQs), the WTO’s Article XXIV injunction
that their effects be no higher or more restrictive against third parties than
the prevailing ‘duties and other regulations of commerce existing … prior to
the formation of the free trade area’.
At Maui, this parallel
universe of discriminatory measures against outsiders caught up with insiders
too.
Negotiations to bring the
end-game to a close were ‘gob-smacked’
by the resistance of NAFTA beneficiaries Canada and Mexico to pluralising and
liberalising their hitherto restrictive — and privileged — access to the US
auto-parts market in favour of Japanese auto supply chain participants.
Under NAFTA, cars made in
all three countries are sold duty free so long as 62.5 per cent of vehicle
content originates within the PTA area. The bilateral deal between the US and
Japan would have cut this figure to 55 per cent — a significant concession on
the part of the Japanese (given their typically lower content rules in other
PTAs), though balanced with changes to value content accounting rules and other
exemptions favourable to Tokyo. Canada and Mexico were not privy to the prior US–Japan
exchanges and reacted with annoyance in Maui.
For the most part, this auto
sector content issue can be resolved within a pluralised discussion format
involving the United States, Japan, Mexico and Canada — albeit with a less
liberal regional value content rule. US industry is mostly, if reluctantly, on
board; the Abe government appears willing to work issues through with the
currently integrated structure of the North American supply chain; and Japanese
auto companies are themselves unevenly impacted by the content origination
rule.
A similarly pluralised
discussion format involving a mix of offensive (New Zealand, Australia, US) and
defensive (Japan, Canada, Mexico) interests could resolve the complexities in
dairy trade. In its recent Comprehensive Economic and Trade Agreement with the
European Union, Canada for the first time granted additional dairy market
access under a bilateral deal beyond its WTO commitments.
Commercially meaningful
access provided by Ottawa (and Tokyo) to its TPP partners in select tariff
lines that reaches well beyond simple in-quota tariff cuts and quota
reallocation should broaden the overall market size and enable the more
mercantilist-minded parties in this sectoral to exchange market access
concessions within. But with over two-thirds of dairy farmers residing in
vote-rich Ontario and Quebec, hard political bargaining on this front will have
to await the completion of the Canadian elections on 19 October this year.
A far sterner test awaits on
sugar. The US market is governed by convoluted rules that set foreign access
quotas, allot overall annual supply, lay down de facto price floors,
while operating as a ‘no cost’ (to government) subsidy scheme. Within these
parameters, NAFTA partner Mexico has uniquely had the right since 2008 to sell
sugar to the US market without limit — although, with a view to shielding its
privileged insider status, it effectively agreed to a voluntary export
restraint regime in 2014. Mexico will not cede further space on
sugar to third parties in the US market.
No such sweetheart bilateral
arrangement exists for Canberra. Australian sugar remains tied to its Uruguay
Round TRQ allotment (which is barely a fifteenth of the volumes currently
shipped by Mexico), with token additional access on offer in TPP. But Canberra
is unwilling to have its sugar sector thrown under the bus yet again in a
significant FTA negotiation. Canberra is able and willing to exercise veto
points across chapters in the broader negotiations to extract payment in this
regard.
If a bargain on sugar is to
hence fructify and additionally catalyse the TPP endgame,
Washington will have to reshuffle its domestic–foreign allotment limits to
accommodate a non-trivial increase in Australia’s sugar quota. Whether domestic
producers, who account for just 1.3 per cent of total farm production by value
but 40 per cent of crop
industries’ lobbying expenditure will relent at a time of
over-supply and tight margins will be worth watching closely.
In their Report to Leaders
of October 2013, the TPP trade ministers had noted that their negotiators would
‘construct a single tariff schedule and have common rules of origin … that
encourage cumulation [of originating inputs into production and processing
from] across the region’. That this has remained a dead letter in the case of sensitive
products is due in considerable measure to US Trade Representative Michael
Froman’s strategic miscalculation to treat a regional negotiation as a set of
bilateral ones — to the point of almost unravelling the overall negotiation. If
TPP is to be the comprehensive, next-generation ‘building block’ for 21st
century trade liberalisation that it aspires to be, and not the ‘stumbling
block’ that NAFTA has become, Froman and his 11 partners should expend the
necessary political capital to hew close to their own report of October 2013.
Sourabh Gupta is a Senior
Research Associate at Samuels International Associates, Inc.
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