The Prisoners' Dilemma Posed by Free Trade Agreements: Can Open Access Provisions Provide an Escape?

Abstract This article explains why free trade agreements (FTAs) that are not compliant with the spirit of GATT Article XXIV's requirement that such agreements cover "substantially all the trade" between the parties pose serious challenges for the multilateral trading system. It notes the paradoxical behavior of WTO members in continuing to negotiate such free trade agreements to the detriment of the WTO. It characterizes this paradox as a form of Prisoners' Dilemma, in that although members would be better off pursuing trade liberalization via the WTO, their dominant strategy is to pursue FTAs. The article goes on to propose a pragmatic solution to resolve the dilemma that attempts to navigate the difficulties posed by both retrospective and prospective solutions. I. INTRODUCTION This article examines in detail why the proliferation of free trade agreements (FTAs) presents a serious problem for the World Trade Organization (WTO) and the international trading system. I explain why WTO members paradoxically persist in negotiating FTAs even though such agreements undermine the WTO and offer a pragmatic solution to this seemingly intractable dilemma. This article proceeds as follows. Part II discusses the nature of the free trade agreement problem. In particular, Part II addresses how FTAs direaten the multilateral trading system established by the WTO and explains why Article XXIV of the General Agreement on Tariffs and Trade (GATT) - the provision that addresses FTA formation - suffers from interpretive difficulties and is presendy an ineffective tool. Part III identifies a paradox in WTO member behavior: members believe negotiating trade concessions within the WTO framework is preferable to entering into FTAs, yet members undermine the strength of the WTO by continuing to negotiate FTAs apace. I characterize this paradox as a form of Prisoners' Dilemma and utilize game theory concepts in Part III to explain why the paradox occurs. Part IV addresses whether actions to remedy die FTA problem are necessary. I argue that there is the potential for an FTA to be declared inconsistent with Article XXIV in WTO dispute settiement and that the ramifications such a decision would have are sufficienti}' serious diat it would be prudent for WTO members to address the problem proactively rather than wait for a WTO dispute to arise. Part V identifies why addressing the problem is so difficult, and defines the parameters within which any solution will likely need to fall. Part VI suggests a pragmatic approach to the Article XXIV problem that would fall within the narrow parameters set forth in Part V. It proposes: (a) clarifying the meaning of "substantially all the trade" in Article XXIV, (b) holding new FTAs to the agreed-to definition, and (c) permitting parties to existing FTAs to either amend their agreements to conform to the new definition or alternatively to amend their agreements to include an open accession provision, if one is not already in place. This Part then acknowledges and addresses some of the difficulties with the proposed approach, and also identifies systemic benefits of the open accession option. Part VII concludes. II. THE FREE TRADE AGREEMENT PROBLEM In order to illustrate the problem free trade agreements (FTAs)1 pose for the multilateral trading system, this Part first introduces the WTO, its precursor entity (the GATT), and the core principle of most-favored nation (MFN). It next explains how FTAs have eroded the MFN principle and how this phenomenon has been able to occur under the current WTO rules. Finally, it discusses the impact of proliferating FTAs on the WTO. A. THE GATT, THE WTO, AND THE MFN PRINCIPLE At the multilateral level, the WTO is the primary instrument through which international trade is regulated. The WTO came into effect in 1995 and covers, inter alia, trade in goods, services, and aspects of intellectual property. Although the WTO itself is a relatively new organization, it grew out of an earlier international effort to reduce trade barriers - the GATT. …