Double Win for the Trade Liberalization in Bali

November 19, 2014 3:30 PM

Two recent developments have the trade world buzzing and for good reason: the US-China agreement on tariff liberalization as part of the expanded Information Technology Agreement (ITA) and the US-India resolution to the impasse over the Trade Facilitation Agreement (TFA). These two agreements, along with the Trade in Services Agreement (TISA) under negotiation by 22 countries, would be genuine accomplishments for the World Trade Organization (WTO) at a time when the post-Bali trade agenda has stalled, throwing its relevance as a negotiating forum into doubt. If successful, the three agreements could add as much as $2 trillion to global income, as the Peterson Institute estimated in a previous research study, Payoff from the World Trade Agenda 2013 [pdf].

A Tariff Liberalization Compromise in the ITA

The first breakthrough came on November 10, 2014, after the talks over the expanded ITA stalled for more than a year. The original agreement phasing out tariffs on high-tech goods was signed by 29 WTO members in 1996. Since then, total trade in IT products has tripled, reaching $4 trillion, and the agreement has expanded to 80 countries covering 97 percent of global trade in IT products.1

The digital age spurred efforts to expand the ITA to cover new products and new members in 2012. But the talks reached an impasse over China's refusal to agree to tariff liberalization for a comprehensive list of products. The US-China bilateral compromise centered on more than 200 tariff lines, including such important US exports as advanced semiconductors, MRI machines, video games, and GPS devices. Tariffs are to be phased out over periods up to five years (or seven in special cases). According to the United States Trade Representative (USTR), the deal would eliminate tariffs on $1 trillion of trade and increase global GDP by $190 billion, supporting an additional 60,000 US jobs. China's original list of sensitive products numbered close to 140 out of 250, and China sought to fully exclude more than 70 of these products and subject another 70 to long phaseout periods.2 Given its negotiating history, China demonstrated laudable flexibility on the sidelines of the Asia Pacific Economic Conference summit in Beijing in November.

The deal must now be accepted in Geneva, but the shift in the Chinese position effectively unblocked the ITA talks and they might well conclude as early as December 2014. US-China cooperation on ITA could positively affect other areas, especially TISA, where the United States previously voiced opposition to China's participation—in part, because China was unwilling to make "de facto down payments" (like the ITA) that showed a commitment to the ambitious liberalization agenda of other TISA countries.3

Unblocking the Trade Facilitation Agreement

Two days after the technology handshake, on November 12, 2014, the United States and India announced a bilateral compromise to unblock implementation of the TFA. The trade facilitation agreement would reduce transactions costs, red tape, and corruption at sea ports and cargo airports, improving logistics and reducing time and costs in the movement of goods. Last December, WTO members agreed to the trade facilitation deal at the ninth Ministerial meeting in Bali, along with nine other agreements addressing agricultural issues, cotton subsidies and development issues of concern to least-developed countries. Because of the lagging Doha agenda, trade policy experts agreed that TFA was the most important deal of the package of agreements in Bali. But in July 2014, India reneged on the bargain in Bali, insisting that a separate agreement on food security, also part of the Bali package, should be completed before TFA could become a binding part of the WTO.4 As explained in an earlier PIIE blog post, India demanded that developing country governments be permitted to purchase food at high prices, distribute the food to poorer regions, and export whatever was left over—with no fear of challenges by other WTO members. In response to India's demand for this exemption, the United States and the European Union offered a "clarification" of the Bali decision, but ruled out an amendment to the agreement. India rejected the offer, prompting the United States, the European Union, Japan, and Canada to suspend further discussion on all "post-Bali" topics on services, development issues, and agriculture until the TFA issue was resolved.

The US-India compromise entails a reinterpretation of the original Bali deal, declaring that food stockholding programs will not be subject to WTO dispute procedures until a permanent agreement is reached. This compromise clears the way for possible approval of the TFA on November 26, opening a path for WTO members to negotiate other post-Bali issues.

Opening the Door to Plurilaterals

The successful outcomes of TFA and the ITA could signal a turning point for the WTO. Two key questions are pending. First, will success open the door to put new issues on the WTO agenda, to be negotiated as plurilateral agreements? Second, will other countries be emboldened to follow India's example and hold hostage future WTO negotiations?

The success of TFA and ITA could revive momentum toward resolving other issues on the global trade agenda, such as services, investment, and environmental goods. We have long argued [pdf] that the most promising route for such issues seems to be plurilateral agreements that would apply only to signatory members rather than all WTO members (multilateral agreements). Each agreement under WTO auspices should, as a matter of principle, be open to any WTO member that later decides to join—both to accept the obligations and enjoy the rights. But an important technicality must be resolved first: Will future agreements be based on unconditional or conditional most favored nation (MFN) terms? 5 At the moment, conditional MFN agreements, similar to the design of the TISA, seem the likely route.

A rosy outlook for the WTO is tempered by the challenges of resolving longstanding differences on the issues left over from the Doha agenda. Moreover, the TFA drama casts a negative shadow. It remains troublesome when a country exercises its veto rights to block a declaration signed by all WTO ministers. If future naysayers choose to follow India's tactics, they could stall almost any WTO agreement.

Notes

1. "Azevêdo hails breakthrough on the WTO's Information Technology Agreement," WTO 2014 News Items (accessed on November 17, 2014).

2. See "ITA Talks Struggle To Advance; Hill Trade Leaders Urge Chinese Flexibility," Inside US Trade, November 14, 2013 (accessed on November 17, 2014).

3. See "U.S. Opposition To China's TISA Participation Only Backed By Japan, Canada," Inside US Trade, May 15, 2014 (accessed on November 17, 2014).

4. The original terms of the Bali deal had included a "peace clause" ensuring that litigation against India and other developing members would not be permitted through 2017 if these countries' public stockpiling outlays exceeded the subsidy limits set forth in the WTO Agreement on Agriculture. India wanted a permanent solution drafted for its food stockpiling and distribution program, rather than this temporary deal.

5. Unconditional MFN rights can be extended to all WTO members if the agreement's members account for a high percentage of global trade in the concerned sector; conditional MFN rights can be extended to other countries only if the country accepts the agreement's specified obligations.

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