By: Alan Yanovich1
A few weeks ago, The Economist published an excellent article that drew a contrast between the trade protectionism dominating U.S. politics and the more proactive trade agendas being pursued by other countries, such as the United Arab Emirates, Switzerland, Australia, China, South Korea and even India.2 The Economist is right to draw attention to these developments. Many countries are indeed pursuing a broad range of trade negotiations and creating new trade clubs or updating pre-existing ones. As discussed below, these trade clubs can be quite diverse. For businesses, they present new opportunities and challenges. Clubs can facilitate trade, offer practical solutions to transnational problems, and reduce policy uncertainty. However, they can also erect new barriers, increase compliance costs, and entrench contradictory policy responses. The current drive to create new clubs should be encouraged, but it must be accompanied by parallel efforts to establish a strong framework to regulate the interaction among clubs.
Clubs are far from being a new phenomenon. The General Agreement on Tariffs and Trade (GATT) was itself a club, and the World Trade Organization (WTO) is still a club, albeit one with universal aspirations. The more than 360 free trade agreements (FTAs) in force around the world are also clubs.3
Clubs come in many shapes and sizes and are driven by different motivations.
The GATT involved parties gradually lowering tariffs between them and agreeing to a limited (but important) set of common rules. Most Favoured Nation (MFN) treatment was a key feature—all club members had to be treated just as good as every other member—but it came with a big exception—the right to establish FTAs among a subgroup of members. This approach was later incorporated into the WTO. FTAs are more exclusive clubs. They provide better treatment for their members than the GATT/WTO and parties commit to stricter trade disciplines. In some cases, FTAs require members to take on non-trade commitments, such as minimum standards for labour and the protection of the environment. Recently, the members of the European Free Trade Association (Switzerland, Norway, Iceland, and Liechtenstein) took on a novel commitment to increase foreign direct investment (FDI) to India by US$100 billion over a period of 15 years, as part of their new FTA with India.4
Today, the WTO has become less exclusive as it aspires to universality. FTAs continue to proliferate. The Asia-Pacific has seen the creation of two large agreements—the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Regional Comprehensive Economic Partnership (RCEP)—and Association of Southeast Asian Nations (ASEAN) has emerged as a key hub connecting its members with several other large economies in the region. A very large FTA is being implemented in Africa—the African Continental Free Trade Area (AfCTA). Several older FTAs are being updated (e.g., EU-Chile and EU-Mexico). And FTAs, like CPTPP, are attracting new members.
This vibrant scene goes beyond FTAs. Countries are entering into smaller deals or negotiating issue-specific arrangements. The urgency of mitigating climate change risks has given impetus to a number of initiatives to establish green clubs. One of the most ambitious is the recently concluded Agreement on Climate Change, Trade and Sustainability (ACCTS) between Switzerland, Costa Rica, Iceland and New Zealand. The ACCTS reportedly eliminates tariffs on over 300 environmental goods, will facilitate trade in more than 100 environmentally related services, includes guidelines on the use of voluntary eco-labelling and contains disciplines on harmful fossil fuel subsides.5 Proponents of the so-called Global Arrangement on Sustainable Steel and Aluminum (GSSA) see it as a green club that would bring together countries with steel and aluminium industries that emit lower greenhouse gas emissions. This would be a smaller club in product scope, but could have an enormous impact.
In the past, developing countries formed clubs to manage supplies of commodities in an effort to increase their prices. Today, developed economies are looking at clubs to secure access to critical minerals and, in particular, to reduce their dependence on China. Some of these efforts concern raw materials that play a key role in green technologies. For example, the United States is leading the Minerals Security Partnership (MSP), which includes Australia, Canada, India, Japan, Korea, Norway, the United Kingdom, as well as the EU and several EU member states.6 For its part, the European Commission also has affirmed its intention to establish a Critical Raw Materials Club.7 It has also signed a partnership with Australia on critical and strategic materials.8
Some clubs are premised on greater trust between members. Trust among regulators is a key factor underlying a large number of mutual recognition agreements (MRAs) that exist today. As The Economist notes, these agreements can have a large economic impact.9 Beyond MRAs, trust is an important underlying factor in technology clubs. As controls on the export of semiconductors and other sensitive technologies grow, we are likely to see the emergence of technology clubs among the United States and its allies, which facilitate trade among trusted members, while maintaining strict controls on trade outside the club or even increasing them.
Other clubs are motivated by a desire to promote a preferred approach to regulating a new field. A club can be a way of promoting a particular template of international regulation. The desire to promote a template may have been a likely motivation underlying the Digital Economy Partnership Agreement (DEPA), a partnership between New Zealand, Chile, Singapore and Korea to facilitate digital trade.10 Clubs that have first mover advantage can help popularize a particular regulatory approach as the club is expanded, or as others borrow provisions from the template and incorporate them into their own agreements.
Clubs have positive elements and bring with them opportunities for governments and businesses. They are examples of cooperation—that is, countries working together to find common solutions to transnational problems, such as climate change. Also, clubs can increase trade by reducing tariffs and other barriers, even if among a smaller group of countries. This can translate into lower costs for businesses and consumers. Clubs additionally can bring innovation as different groups of countries test different approaches to common challenges. Furthermore, clubs can increase policy certainty as many countries are less likely to go back on international commitments.
Nevertheless, clubs also bring significant challenges, such as fragmentation, reduced efficiencies, trade diversion, and higher compliance costs as businesses have to comply with the different requirements of each club. The rule under the GATT/WTO is that FTAs should eliminate duties and other restrictive regulations on “substantially all the trade” between FTA partners. There has always been some ambiguity as to what this requires. However, countries today seem more willing to pursue deals that cover a limited number of products, while asserting that these arrangements benefit from the FTA exception. We are likely to see more of these arrangements in the future.
Ideally, clubs should be open to new members. This reduces the potential for discrimination and trade diversion. That is not to say that club members should be prohibited from imposing conditions for joining. The WTO requires new entrants to sign up to its agreements and to make trade concessions as a condition for entry. It would be illogical for other clubs not to do the same. The criteria for entry should be objective and transparent.
More challenging are clubs that raise barriers to non-members. For instance, there has been some speculation that the GSSA could raise tariffs on steel and aluminium from non-members, such as China.11 While the WTO allows members to create clubs, such agreements must not result in duties and other regulations that are higher or more restrictive in respect of non-members. A club that raises trade barriers to non-members may reduce trade by more than it increases it. Moreover, it is likely to prompt retaliatory action by affected non-members, which would reduce trade even further. Such clubs could therefore create more problems than they resolve.
Governments should continue to pursue clubs where they see potential to adopt common approaches to resolve transnational problems. Businesses can proactively contribute to these efforts with their input and, where possible, leverage them to address their supply chain and other challenges.
A broader challenge is how to regulate the interaction between these clubs. Until recently, the WTO provided a floor and basic disciplines that constrained clubs from increasing barriers on non-members. But the power of the WTO to constrain members’ conduct is waning due to problems with its dispute settlement mechanism.
We need a strong framework to regulate the interaction between clubs. A world of clubs with potentially higher walls between them will be ever more difficult for businesses to navigate.
1 Any views expressed in this article are solely those of the author. This article does not necessarily reflect the views of Akin, its lawyers or its advisors. I am grateful for comments and suggestions from Rachel Polan, Hannes Sigurgeirsson, Marco Tulio Molina, and Niall Meagher.
2 “Rumours of the trade deal’s death are greatly exaggerated”, The Economist, 13 June 2024.
3 The WTO website reports that, as of 1 August 2024, there were 369 free trade agreements in force. https://www.wto.org/english/tratop_e/region_e/region_e.htm [last accessed 7 August 2024].
4 J.J. Nedumpara and P. Reddy, “India and EFTA: Pioneering Novel FDI Commitments”, Columbia FDI Perspectives, No. 389, 5 August 2024.
5 https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/agreement-on-climate-change-trade-and-sustainability-accts/what-is-the-agreement-on-climate-change-trade-and-sustainability-accts#:~:text=The%20ACCTS%20is%20a%20ground,Switzerland%20outside%20of%20the%20WTO
6 https://www.state.gov/minerals-security-partnership/
7https://www.consilium.europa.eu/en/infographics/critical-raw-materials/. See also https://www.delorscentre.eu/en/publications/critical-raw-materials-club.
8 https://ec.europa.eu/commission/presscorner/detail/en/ip_24_2904
9 “Rumours of the trade deal’s death are greatly exaggerated”, The Economist, 13 June 2024.
10 Korea joined in May 2024. Six other economies (China, Canada, Costa Rica, Peru, the UAE and El Salvador) have applied to join the DEPA. See: https://www.mti.gov.sg/Trade/Digital-Economy-Agreements/The-Digital-Economy-Partnership-Agreement.
11 https://www.americanprogress.org/article/trade-beyond-neoliberalism-concluding-a-global-arrangement-on-sustainable-steel-and-aluminum/#:~:text=The%20%E2%80%9Cfuture%20arrangements%E2%80%9D%20contemplated%20in,certain%20emissions%20thresholds%20in%20their