Valdai Club

In today’s global economy the dominant mode of economic integration and trade liberalization is that of regional and bilateral trade alliances – across virtually all major regions of the world new trade deals are struck – from the creation of bilateral preferential agreements to the recent emergence of the Trans-Pacific Partnership.

There is certainly more to come as the US will be seeking to forge trade deals with the EU, while China and Russia may seek to bolster trade integration in Eurasia. Aside from the frequent lack of coordination with the WTO in the formation of regional blocks, there is the specter of mounting tensions in the balance of power between the emerging mega-alliances.

What is more, amid the waning dynamism of the world economy it is beyond any doubt that the propagation of regional trade arrangements (RTAs) has created challenges not only for economic policy coordination but that it has also generated major headwinds for global growth. Indeed, as RTAs gained momentum in the past several decades multilateral liberalization was relegated to the back-burner, with the price paid by the world economy being rampant protectionism - the Global trade alert (GTA) estimates current levels of protectionism at their highest levels in the past several decades. The ultimate victim of these trends is global growth, with the marked deceleration in recent periods adversely affecting the welfare of the consumers.

In the end a world based on unfettered RTA proliferation is a world that benefits the most advanced and developed economies, with the effects of trade diversion further sidelining the laggards from the core of the world economy. It is a world in which initial advantage can be further reinforced through ever more trade and investment flowing to the core, with the pattern being that of cumulative causation, i.e. progressive reinforcement of initial advantages. This in turn may act to deter the process of economic convergence of developing countries towards the developed world, with adverse implications for global growth rates.

At this stage there is neither a systematic monitoring/tracking of the emergence of new regional trade arrangements, nor a comprehensive inventory of existing agreements, let alone any fundamental estimates of how this cob-web of trade alliances is impacting the global economy and individual countries through spillover effects such as trade creation/trade diversion. In its current state the WTO is powerless against the ever rising tide of preferential agreements, with hardly any significant discussions in the WTO throughout the past decade being directed towards addressing this fundamental void in global economic governance.

Given the above there may be a case for what may be referred to as “integrity in trade integration”, whereby certain rules and principles of conduct are applied to the operation of RTAs. Such a code of conduct could be elaborated within the World Trade Organization (WTO) with support from other multilateral organizations and its effectiveness could be reinforced by the operation of the Dispute Settlement Body (DSB) of the WTO. The observance of the Code could be a regular part of the country reviews undertaken by the WTO, while non-compliance could make countries susceptible to complaints being launched into the DSB by members of the organization.

The main elements of a code of conduct for regional blocks could include the following:

- transparency: all discussions on the formation of trade blocks are to be public and not to be directed against any other trade blocks
- openness: regional blocks need to allow for trade liberalization to be undertaken to third parties or for compensation to be accorded to those countries that are significantly affected by the formation of regional blocks
- compliance with multilateral norms of the WTO: deviations from rules governing RTAs need to be closely monitored and assessed in terms of the effects on third parties

In order for the conditionality pertaining to the observance of the Code to be more binding, greater coordination of such norms and policies would need to be undertaken with the IMF, the World Bank and other multilateral institutions. Some of the largest economies in the WTO, such as the BRICS, could also form a group within the WTO that prioritizes greater scrutiny and compliance with WTO rules of preferential trade agreements.

Some may argue that it is too late to fret about multilateralism in global trade, since the prevalence and the dominance of RTAs is now beyond any scope of regulation. If they are right, the future of the world economy is unlikely to be as bright as once seen by Keynes in his famous treatise “Economic Possibilities for our Grandchildren”, where in the midst of the Great Depression he correctly predicted the spectacular rise in the standards of living for the population in advanced economies in the subsequent 100 years. As if foreseeing future challenges for the global economy Keynes’ greatest legacy was that of a global multilateral policy framework – the set of Bretton Woods institutions. Today this system of global governance, including the balance of power between the forces or regionalism and globalism is in need of a Neo-Keynesian recalibration.