RTAs: Threat or Opportunity for the WTO? - The Economist‘s View -

1. RTAs:Threat or Opportunity for the WTO?- The Economist‘s View - Dipl.-Vw. Jürgen Matthes Head International Economic Policy Department

2. Bilateralism – Facts and Evaluation • New Bilateralism since 2000 – Unprecedented Boom: 16 RTAs per year • Now clear evidence: Stumbling Bloc for the WTO and for the Doha-Round • Preference Erosion • Less Pressure on Protectionsts when Exporters have Bilaterals as an alternative • Concessions may be held back for Bilaterals • Threat to global welfare • Empirical evidence: Global effects of RTAs unclear, could even be harmful • South-South bilaterals (vast numbers) are more trade diverting than North-South deals • Sand in the wheels of Globalisation and efficient Production Networks (esp. in Asia) • Spaghetti Bowl, Transaction Cost increase, especially due to pref. Rules of Origin Jürgen Matthes: RTAs - Threat or Opportunity for the WTO? WTO Public Forum, September 25, 2006

3. Evaluation (2): Race for Markets • Important reason for surge in Bilaterals: Race for Markets • Anecdotal evidence: • Asia currently with the strongest activity in bilaterals (China, Japan, ASEAN etc.) • Competition among US and EU (Mexico, Chile – now Asia) • Game Theory: Bilateralism is a dominant strategy • No matter what the US does, for the EU an RTA with (say) India is the best choice • Self-reinforcing Race for Markets – largely explains Boom in Bilaterals since 2000 • Problem: Social Dilemma • For individual countries Bilateralism is rational • For global welfare Bilateralism and the Race for Markets is likely to be detrimental • Stopping Bilateralism is a kind of Public Good, but government intervention not feasible Jürgen Matthes: RTAs - Threat or Opportunity for the WTO? WTO Public Forum, September 25, 2006

4. Renaissance of the WTO? • Failure of Bilateralism as a Catalyst for a Return to the WTO in 10 to 15 years? • Do we have to go “Per Aspera ad Astra”? • For DCs (particularly in Asia): Bilateralism will likely prove a dead-end • Poor DCs are left out • South-South RTAs with Welfare Losses due to Trade Diversion • Transaction costs (esp. relevant for DC-companies and in Intermediates) • North-South RTAs less attractive than hoped for • Asymmetric Power Balance – Unwanted Issues (IP, Capital controls) • RTAs are Positional Goods which lose value with increasing membership • Problem: For IC Bilateralism has fewer Disadvantages • Power Wielding, New Issues, Hub-and-Spoke-Structure (but Transaction Costs) • This could bring DCs back to the WTO – may be even sooner than later Jürgen Matthes: RTAs - Threat or Opportunity for the WTO? WTO Public Forum, September 25, 2006

5. In the Meantime: Mitigation • Bilateralism is unstoppable for the moment • How can its detrimental effects be mitigated • GATT Art. 24: • Clearer interpretation of vague rules, e.g. „substantially all trade“ • Additional Demand: Lower barriers to outsiders to avoid trade diversion • Reform of Enabling Clause: less Leeway for DC to avoid Trade Diversion • Harmonisation of preferential RoO would reduce transation costs • Templates for RTAs • Avoid dead-ends in new issues such as standards, investment, etc. • Problem: Reform unlikely, but all the more necessary Jürgen Matthes: RTAs - Threat or Opportunity for the WTO? WTO Public Forum, September 25, 2006

6. RTAs: Threat or Opportunity for the WTO?- The Economist‘s View –Thank you for your attention Dipl.-Vw. Jürgen Matthes Head International Economic Policy Department