7 December 2022

Emily Lydgate, Reader in Environmental Law at University of Sussex and Deputy Director of the UKTPO [1]

Figures from the World Trade Organization suggest that the negotiation of new Free Trade Agreements (FTAs) peaked in 2008, and has since declined.[2] Meanwhile, the Biden Administration has disavowed FTAs. The UK emerged post-Brexit as an enthusiastic advocate, responsible for much of the 2020 outlying peak in WTO FTA notifications. However, even in the UK, the Trade Secretary recently said: ‘I would like us to move away from the DIT being seen as the Department for Free Trade Agreements and back to the Department for International Trade.’

Having created a so-called spaghetti bowl of FTAs, are the wealthy countries that have driven most FTA negotiations[3] finally running out of noodles?

It’s hard to conclude so when trade cooperation seems like it has never been higher on the political agenda for many of them. From oil and gas to medical supplies, to green steel and aluminium, countries are pursuing new trade arrangements and agreements. It’s just that these don’t look much like the FTAs of the past.

In this blog, I suggest three broad trends for future regional trade cooperation, and reflect on the challenges for the international trade system that they bring into focus.

1) Flipping the hierarchy between ‘trade’ and ‘non-trade’ objectives

Both academics and trade officials have traditionally divided trade from non-trade objectives, the former representing consumer-welfare-oriented economic objectives, and the latter encompassing environment, human rights, and national security. A common discourse among trade officials and others was that trade agreements should be primarily ‘about’ trade. This has been accompanied by vigorous debate about the appropriate role of non-trade objectives, often described as ‘trade-and’ debates, and the increasing incorporation of provisions on the latter into FTAs to provide them with more social legitimacy and acceptance.[4]

More recently, what were formerly often thought of as non-trade objectives are not just incorporated as so-called flanking measures, but rather driving which countries trade with which and how they trade. This is giving rise to new trade agreements that are no longer primarily ‘about’ trade, as traditionally understood (examples in item 3). Trade cooperation has even more relevance than ever, but in service of other geopolitical objectives, be they supporting the low-carbon transition, supply chain resilience, or economic security.

2) More trade barriers with non-‘like-minded’ countries

There are two sides of the coin when it comes to organising trade around geopolitical objectives. The first is using trade liberalisation and trade cooperation with allies; the second is erecting trade barriers with non-allies. This is evident through increased interest in, and use of, trade sanctions, not only against Russia but also through legislation like the proposed EU Anti-Coercion Instrument and the US Uyghur Forced Labor Prevention Act. Both focus on trade as a foreign policy tool to try to prompt reforms in other countries.

Also, countries are increasingly embedding so-called non-trade objectives into unilateral market access restrictions. This is evident through the EU’s proposed Carbon Border Adjustment Mechanism, which extends EU Emissions Trading Scheme carbon prices to imported products in some trade-exposed sectors. It is also evident in the EU’s proposed Deforestation Free Commodities regulation, which attempts to reduce ‘embedded deforestation’ in some (mostly tropical) agricultural commodities, and its proposed Corporate Sustainability Due Diligence regulation, which ensures that companies exporting to the EU account for human rights and environmental impacts of production.

Finally, countries are trying to shore up production capacity where they have determined that dependence on other countries threatens economic security – such as the US Chips Act – or where they want to subsidize domestic competitiveness and supply chains among trade allies  – such as the US Inflation Reduction Act (IRA).

3)

These efforts to condition trade on complying with various production requirements, or shore up domestic supply (or supply among only some countries), can have collateral damage for trade cooperation even among countries who identify as allies on particular objectives. A good example of this is the IRA, which has challenged climate cooperation between the EU and US, prompting a complaint in Europe that this ‘is not how you treat friends’.

The future of trade cooperation is regulatory

When they do result in cooperation, these trends can yield trade agreements that hardly resemble those of the past. The Indo-Pacific Framework for Prosperity (IPEF) is a good example: it doesn’t contain many of the ‘traditional’ ingredients of FTAs: tariff liberalisation, Rules of Origin, services schedules and dispute settlement. Instead, it focuses on regulatory cooperation to further shared objectives.  The proposed Global Arrangement on Sustainable Steel and Aluminium between the EU and US proposes erecting trade barriers on non-‘like-minded ‘countries that don’t adhere to low-carbon standards, or aren’t sufficiently market-oriented, and the ACCTS and Singapore-Australia Green Economy Agreement position environment and climate goals as top-line objectives. This trend is also evident in emerging Digital Trade Agreements and through the use of the G7 as a forum for high-level cooperation on trade and regulatory issues like taxation of tech giants, climate clubs and potentially economic security.

Future challenges for regional trade cooperation

These new developments give rise to two challenges, which are in fact not new at all but have taken on new significance. The first is, having identified shared values, can allies actually achieve the regulatory cooperation necessary to support them? Regulatory cooperation has been part of the traditional multilateral and FTA agenda for long enough that we know exactly how bad countries are at achieving it. In the WTO, countries negotiated the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) Agreements, which encourage countries to relax their regulatory requirements for foreign firms by recognising that the country of origin achieves equivalent levels of protection. However, countries have been reluctant to concede that others achieve such equivalence.[5] For example, it took the US and the EU years to grant mutual recognition of pharmaceutical inspections, such that an EU facility could produce a US-approved drug and vice-versa. The EU has succeeded in concluding so-called Mutual Recognition Agreements in a few sectors with some countries, but many of these have been only partially functional in practice. Experience has shown that countries are reluctant to cede sovereignty over their regulatory requirements.

Emerging challenges, such as identifying common ways of measuring and pricing carbon emissions, or regulating digital trade, also require countries to understand differences in national approaches, and even, to some extent, to harmonise these approaches (or at least find ways of agreeing that different approaches are equivalent). As I examined in a recent analysis of models for climate cooperation through ‘clubs’, trust is a necessary ingredient for such models to function, and it may necessitate shifts in how countries traditionally monitor regulatory compliance.

The second challenge has to do with the politics of exclusion. The atomisation of trade along geopolitical lines may serve to exacerbate global tensions. There is a long-established correspondence between trade wars and other types of conflict. While trade conflict may be a symptom rather than a cause of tensions between the US and China, or Russia and the Western world, trying to achieve similar outcomes with (or at least ones that are compatible with) multilateral institutions such as the WTO should be pursued.

Finally, most of the regional cooperation agreements described above are led by the EU and US, which have long been influential in developing new approaches to trade cooperation that affect countries within their economic sphere of influence, or other wealthy countries. Though not explicitly identified as being non-‘like-minded’, there is a risk that developing countries will be excluded from new agreements simply by virtue of not being in the room. Regulatory cooperation, as well as new unilateral requirements to shape production conditions in other countries, risk being unnecessarily exclusive, particularly where these regulatory requirements are cumbersome to implement.

Footnotes

[1] Based on remarks for UKTPO Annual Conference, panel discussion on What Role for FTAs in trade policy?

[2] Note that they are referred to in the WTO as ‘Regional Trade Agreements’

[3] The EU is in first place for most FTAs; the UK is second. https://rtais.wto.org/UI/charts.aspx

[4] Lang presciently explored the theoretical limitations of this hierarchy in 2009.

[5] See, eg, H. Zuniga Schroder (2011), Harmonisation, Equivalence and Mutual Recognition of Standards (Netherlands: Wolters Kluwer)

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