Tangled web we weave
The Standard, Hong Kong
Tangled web we weave
The hundreds of bilateral and regional trade deals around or being crafted is creating a brave new world for business, reports Daniel Hilken
19 December 2005
Critics of the World Trade Organization who see its comprehensive multilateral agreements as the chief obstacle to a fair deal for developing nations may be barking up the wrong tree.
As often as not, say diplomats and businessmen, it’s the "spaghetti bowl" of exclusive pacts between nations and within regions that prevent the full diffusion of the wealth engendered by globalization.
"What few people realize is that bilateral [nation-to-nation] agreements have very troublesome consequences for the global production system," says Victor Fung, chairman of the Hong Kong-based international trading group Li & Fung.
Suppose the United States, in a gesture of benevolence, signed a bilateral agreement with impoverished Bhutan, letting T-shirts made in the tiny Himalayan nation to enter the country with zero tariffs and quotas.
There’s one catch, naturally - the T-shirts could not include materials sourced outside Bhutan, or perhaps outside a circle of small neighboring economies.
While it might make a good political impression, it would make a nonsense of globalization because Bhutan on its own could never meet the standards demanded by US retailers.
To have any chance at all of competing with established exporters, some, probably most, of the production process would have to take place outside the geographical scope of the bilateral agreement.
Fung, speaking in October to a United Nations-sponsored symposium in Macau on the current round of WTO negotiations, offered an insight into the real world of international trading.
"Today, if we get an order for 10,000 shirts, what shall we do?
"We must first consider the best place to source the yarn required for making those shirts. Having analyzed what is available in the world, we may decide that Korea is the best place to produce that particular type of yarn.
"Next, where should we do the dyeing and the weaving to make the fabric? It depends on the client’s need, the timing, the capacity and the technology requirements. Let us say, in this example, we decide that Taiwan is the best place.
"After the fabric is produced, the next thing is to identify the best place to produce the shirts - where to do the [cut, make and trim] - the final stage adding value to the whole process. For labor, capacity and skill reasons, we may, for instance, want to do it in Thailand.
"While this creates obvious gains for consumers, it also enables more locations worldwide to participate and contribute according to their own skills and capabilities, and develop their own competitive strengths," Fung said.
High tariffs and quotas - especially on textiles - apply to all items exported by the nations Fung mentioned.
Yet it would be hard for a nation that was exempted from these restrictions to become part of the chain as long as it could not seek outside help to compensate for the low productivity and skills and backward infrastructure and services typical of disadvantaged countries.
On the other hand, big countries like China find exclusive bilateral arrangements very much to their liking. They are large enough to be able to specialize in many areas of business; doing all production within one state is no problem.
Nobel economics laureate Joseph Stiglitz, making a plea for multilateralism during Hong Kong’s WTO meetings last week, said developed countries had inadvertently increased Chinese access to their manufacturing markets more than intended.
The only thing stopping China from totally dominating textile trade, he said, was the emergency quotas thrown up by the developed world.
The "country of origin" preferences in the spaghetti bowl now are so complex that even big firms like Li & Fung find them hard to keep track of.
"For some small firms, it is impossible," according to Fung.
Exacerbating the tangle are the regional free trade groupings like ASEAN, the Association of Southeast Asian Nations.
They may look like WTOs in miniature, but they only cover their members - unlike the WTO’s multilateralism, inspired by the "most favored nation" principle, which requires lower tariffs to apply to all.
"In the discriminatory structure of regional trade agreements lie the seeds of a systemic problem," the WTO’s director of trade policies, Clemens Boonekamp, said during the Hong Kong meetings. "We have almost 190 regional trade agreements that have been notified to the WTO and they have been growing at a rather phenomenal rate.
"Another 50 or 60 have not yet been notified. There are a further 50 or 60 under negotiation.
"So we’re looking at a trading environment, two or three years down the line, with some 300 regional trade agreements.
"They each have their own sets of rules to facilitate trade between them. Those sets of rules are not the same."
The WTO, on the other hand, "gives you a single set of rules. We have transparency requirements, we have non- discriminatory requirements, we have predictability requirements - a single, simple set of rules," Boonekamp said.
What would it take to stem the tide of bilateral and regional agreements?
A truly comprehensive WTO agreement might do the trick, but that surpasses even the rosiest view of the prospects of the current Doha round of talks.
Officials speaking alongside economist Stiglitz at a symposium on the fringes of last week’s meetings said that politics was to blame.
"Unfortunately the current system is here to stay, for political and other reasons," said the Indonesian Minister of Trade, Mari Pangestu.
"The reality is that we are going to have the bilaterals, regionals and WTO all in place together."
Malaysia’s former permanent representative to the WTO, Manickam Supperamaniam, expressed the hopeful view that regional and bilateral pacts could be stepping stones to freer trade.
For one thing, they teach countries how to start trading.
However, Fung harbors no such optimism.
"To advocates of bilateral agreements, I say the following: please show me how a series of bilateral agreements, as they proliferate, somehow merge into a coherent multilateral system.
"The truth is they cannot. Instead they make it harder for business to create value, and hence for economies to create jobs," he said.
