Duty-free Beats headphones? Yes, plurilateral trade agreements have something for everyone

Chad P. Bown (PIIE)

October 20, 2016

Smaller deals and selected countries—that’s the World Trade Organization (WTO) approach to trade deals nowadays. These “critical mass” or “plurilateral” negotiations get far less attention than the North American Free Trade Agreement (NAFTA) or the Trans-Pacific Partnership (TPP)—but quietly bring in real trade benefits and cooperation.

How does this work? Here’s a closer look at the first of these new agreements, a move to lower trade barriers on information technology and medical equipment.

New products require new trade agreements

In July, the United States cut its import tariffs on 201 high-tech products. The European UnionChina, and more than 20 other countries also committed to cut tariffs on the same exact products.

Participating countries made these tariff cuts as part of the WTO’s second Information Technology Agreement (ITA-2). This agreement added the 201 products to a first-generation list from 1996. The earlier ITA-1 slashed tariffs on calculators, word processors, ATMs, and fax machines—all “high-tech” items two decades ago.

So 201 products may not sound like much, but this is actually about 3 percent of all statistical codes that governments use to track international commerce. And global trade in these particular goods amounts to $1.3 trillion per year.

The new ITA-2 has something for almost everyone

With widespread product innovation across so many sectors since 1996, ITA-2 provides a necessary reboot:

  • For millennials, ITA-2 lists video game consoles, digital cameras, headsets, and microphones. Duty-free Beats headphones for everyone!
  • For baby boomers, ITA-2 lowers the cost of importing MRI machines, CT scanners, X-ray equipment, and medical devices like pacemakers. Increased trade in these products has the potential to help manage health-care costs and improve the quality of medical care globally.
  • For multinational companies, ITA-2 covers many “parts”—what economists refer to as intermediate inputs. These processors, controllers, memory, circuits, and semiconductors are the critical components for global supply chains to produce high-tech gadgets. Indeed, the English-language version of the ITA-2 product list repeats the word “parts” more than 70 times.

Why did the ITA-2 negotiations succeed?

1) The critical mass factor helps—Trade treaties aren’t popular these days, but ITA-2 required the participation of only a critical mass of global traders, rather than all 164 WTO members.

However, under a critical mass agreement, countries must then take the import tariff cuts that they gave to each other and extend them free to each of the other 100+ WTO members that were not involved in the negotiations.

2) It was a strategic group of countries—These 24 economies accounted for an estimated 90 percent of global trade in the ITA-2’s 201 products. The number of countries was selectively widened but only to include the most important exporters of the 201 products. Because the other 140 WTO members are not major producers, there is less concern that free benefits will flow to those outside the negotiating club.

3) Smaller groups work more nimbly—ITA-2 did not wait around to be included in a larger and more complex negotiating round, like the WTO’s Doha Round. Many see the Doha Round, the last major WTO negotiations, as ill-conceived. Initiated somewhat hastily after 9/11, Doha had been languishing. US Trade Representative Michael Froman finally announced the United States was abandoning the round in 2015.

4) No congressional approval needed—For the United States, ITA-2 was straightforward because it isn’t a new trade treaty. Instead, the president simply announced the “modification” of tariffs set in the earlier Uruguay Round of the WTO.

Why not include e-commerce, digital privacy, and data localization?

The quick answer is that addressing such issues would have required new congressional approval, on the US side. As the 2016 debate over TPP revealed, Congress may have been less than friendly toward a more far-reaching ITA-2 agreement.

The role Congress plays in US trade negotiations is one big reason the ITA-2 negotiators did not tackle other tough issues related to information technology and the international digital economy, like data localizationdigital privacy, and nondiscriminatory electronic commerce.

But taking on these broader issues would also require the critical mass countries to sign a new and formal “plurilateral” WTO agreement. Any new rules on things like data localization must be done under such a legal form, even if they discipline only the behavior of the critical mass countries. New rules or changes to existing WTO rules require buy-in from the entire WTO membership.

Recent research by Bernard Hoekman and Petros Mavroidis explains the WTO legal process for negotiating these agreements. Subsets of countries can agree to take on such disciplines; the rules and negotiations need to be unobjectionable only to the other 100-plus WTO members, so that they do not seek a veto.

Plurilateral agreements have a precedent

Even in the multilateral system, it is not unprecedented for agreements to involve new rules that only a subset of countries apply to each other.

The WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT, 1948–1994), featured a number of plurilateral agreements. The GATT’s Tokyo Round of negotiations concluded in 1979 with groups of mostly higher-income countries agreeing to new disciplines (or “codes”) that they would apply to only the handful of countries that subscribed.

The GATT codes were a first attempt to discipline newly emerging nontariff barriers, like unnecessary divergences in product technical standards across countries. Only a critical mass signed on, but the GATT used these plurilateral agreements in the 1970s to help sustain multilateral cooperation. The WTO’s latest moves signal an attempt to redeploy the old approach to address new policy problems.

Plurilateral agreements and the future of the WTO

My own research suggests new critical mass and plurilateral agreements could be a way to rejuvenate the WTO. More than a decade ago, scholars like Robert Lawrence and Philip Levy proposed that the WTO lay the groundwork for this type of dealmaking.

The ITA-2 is one such achievement. Plurilateral negotiations over other issues, such as a Trade in Services Agreement (TiSA) and an Environmental Goods Agreement (EGA), are also taking place and could potentially be brought into the WTO. And someday, an ITA-3 may be needed to liberalize trade in either self-driving cars or flying cars, which are surely just around the corner.

The Doha Round had left WTO negotiators languishing. Meanwhile, negotiators in the United States, European Union, Japan, Canada, and other major economies have been shifting their emphasis toward megaregional agreements like TPP and the Trans-Atlantic Trade and Investment Partnership (TTIP).

As the gatekeeper for a nondiscriminatory, rules-based trading system, the WTO has found itself under threat. These new critical mass and plurilateral efforts are positive signs for the negotiating arm of this important multilateral institution.