EGA Members Begin Talks On Critical Mass, Free-Rider Issue

Members of the World Trade Organization plurilateral Environmental Goods Agreement (EGA) at their last round of negotiations began discussions on what should be done if trade among parties to the agreement dips below a “critical mass."

A source in Geneva as well as a source familiar with the negotiations told Inside U.S. Trade that members have not agreed on what percentage of world trade in products covered by the EGA must occur for the so-called critical mass to exist, but members most likely will coalesce around measures similar to those decided on in the Information Technology Agreement (ITA) expansion deal struck in December 2015.

The ITA commits members to hold discussions if the membership of the plurilateral agreement no longer represents a critical mass, defined in the Dec. 16 ITA ministerial declaration as "approximately 90 percent" of trade in the goods covered by that agreement.

Maintaining a level of trade above the critical mass threshold is considered crucial to the success of the EGA -- and plurilateral agreements in general -- because the tariff cuts made by participants will be extended to all WTO members on a most favored nation basis. If trade dips below the agreed-upon threshold, WTO members who do not participate but are major exporters of the covered goods could reap the benefits of the deal without having to lower their own tariffs. This is known as the "free rider" problem.

The Geneva source said the threshold would likely fall around 80 or 90 percent, but held open the possibility that it could be lower given the fact that discussions continue on what goods ultimately will make the final tariff-cutting list.

That source said there is little appetite among EGA members for a proposal that would allow them to withdraw or “snapback” their tariff reductions if the trade threshold is not met, and that such a proposal would raise legal and logistical questions. China's threshold proposal in the ITA expansion talks was characterized by critics as allowing members to “snapback” their tariffs, although the final ITA language did not differ substantially from China's proposal.

The Geneva source said legally there is no precedent for increasing tariff rates after members have bound them to zero in a WTO agreement. Logistically, the source said, no mechanism or procedure exists for members to reintroduce tariffs that have been eliminated, and introducing one in the EGA is unlikely.

But overall, the Geneva source argued that the critical mass issue is unlikely to arise in practice once the deal is finalized because WTO members will be keen to join the agreement, which lowers the chances of trade dropping below the critical mass threshold. EGA negotiators are aiming to conclude negotiations in 2016.

Last modified onThursday, 12 May 2016 15:51
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