7 - Regulatory regionalism in the WTO: Are ‘deep integration’ processes compatible with the multilateral trading system?

Summary

I. Introduction

This chapter assesses the proposition that regulatory provisions in preferential trade agreements (PTAs) are implemented on a most-favoured nation basis and therefore complementary to the multilateral trading system in the WTO. The subject is raised because of the documented prominence that regulatory cooperation has attained in later-generation trade agreements, together with an apparent relative decline of the importance of preferential tariff cuts as a primary motivating force for concluding trade agreements. This was documented by the WTO 2011 Annual Report on preferential trade agreements in its survey of over 97 agreements concluded between 1958 and 2010, and reinforced (or perhaps foretold) by Richard Baldwin's analysis of tariffs and regulations in so-called ‘deep integration’ agreements. As the reasoning goes, regulatory activities – whether they be WTO ‘plus’ or WTO ‘extra’ – do not lend themselves to implementation approaches on a preferential basis. To give just one example, if a country establishes a new competition law, its enforcement will neither favour nor punish foreign firms on the basis of their country of origin. There is nothing inherently externally preferential in the design of a competition law, and it does not become preferential because its origins can be traced to a provision in a preferential trade agreement.

This is the MFN thesis for regulatory regionalism. There is a variation on the theme for services market access commitments in the vein of GATS Article XVI. These restrictions are also notably eliminated by altering domestic regulatory policies. Here, the WTO Report finds that notified GATS V economic integration agreements contain significant levels of market access commitments in excess of those made by the same WTO Members in their GATS schedules. This suggests a possible resulting preferential treatment on behalf of signatory service providers, similar to preferential tariff treatment for trade in goods. However, the WTO Report (and Baldwin) also make the point that it is difficult to establish the country of origin of a service in the first instance, and attempts to clarify or enforce origin, by reference to country of incorporation for example, tend to be sufficiently porous to allow foreign third-country affiliates and subsidiaries to derive the benefits from doing business in a trade agreement partner's territory.