Costs and Benefits of Preferential Trade Agreements

In this comment on Martin Wolf's column on the costs of preferential trading agreements (PTAs), Robert Wade notes that there is an additional cost imposed on undeveloped countries in many of these agreements, constraints on their development path that are built into the agreements.

Why would developing countries accept constraints on development as a condition of these agreements? One reason, of course, is to enhance trade but another is that trading agreements with the U.S. come with a large positive insurance externality, military protection from the U.S.:

Robert Wade: A comment on Martin’s general assessment of bilateral-regional trade agreements as compared with WTO agreements...

Like most economists assessing bilateral-regional trade agreements, Martin assesses them on the assumption that the objective of trade policy is to maximize trade... Hence the central issue is “trade creation vs. trade diversion”.... Martin rightly extends this standard framework of efficiency costs and benefits to include also the effects on inter-state competition and conflict.

But one should also assess trade agreements in terms of their impact on ... the diversification and upgrading of production over time, especially in the case of the “southern” partners. Different rules ... governing tariffs, foreign direct investment, intellectual property, the mobility of financial capital, public procurement, and the like - have different impacts on a country’s development trajectory, some being more constraining, more “locking in to existing comparative advantage”, than others.

As Kenneth Shadlen shows in an important article (“Exchanging development for market access?...”, Rev. Int. Pol. Econ. 12 (5), 2005, 750-75), preferential trade agreements involve the southern partner receiving better market access for existing exports, in return for “reforms” deep within its borders ... “Reforms” mean putting the government under new constraints not to use industrial policy instruments to accelerate production diversification and upgrading – instruments of the kind that most of the now developed countries used during their rapid development phase. Hence the risk of freezing the existing division of labour between the trade partners.

On the other hand [under] the WTO’s multilateral rules ... ... the powerful northern countries are a bit less able to close down this policy space and neutralize the competition from southern producers than they are in bilateral or regional agreements. This is one very good reason for supporting the WTO and discouraging the proliferation of PTAs. ...

If PTAs typically shrink policy space even more than the WTO agreements why are many governments rushing to sign such agreements with the US? In the case of the Singapore-US PTA the negotiations almost broke down over ... the US’s insistence that Singapore commit to never applying restrictions on the mobility of financial capital. In the end the Singapore government more or less acceded to the US demand, for the reason (so I was told by a leading Singapore participant) that Singapore’s prime concern was less with the economics ... than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation ... as North Korea could explode on its doorstep and China-Taiwan could explode to the south. Also, of course, Korea ... has built up a highly competitive set of industries and world-spanning firms, with a huge R&D capability; so is much less likely to experience a freezing of existing comparative advantage than most developing countries.

A final point. Arguably the single biggest threat to the stability of the world trade system comes not from within the trade system (e.g. proliferation of preferential trade agreements) but from the lack of multilateral disciplines over the exchange rates and macroeconomic policies of the major economic states (G3)... I’ll elaborate at a later time.

Comments

[Callahan]

I can think of one possible benefit, but it is down the road a bit. After we crash and burn, and find ourselves a "developing country" otherwise known as a "bananna republic", maybe some of our trade partners will do unto us as we are doing unto them.

Going to tent city, tent city here I come,
there'all be some good livin there,
and I'm a gonna git me some.

[real person from the real world]

Callahan, don't you think some of what is going on, like the some of these 3rd world types coming to the US to start firms and work the US labor markets to their benefit, is analagous to the 18th century where the Brits were colonializing some of the same coutries? I certainly do: Going to the other country to make ones fortune by paying low wages to the locals, providing low end work for the natives while retaining the high end jobs (this is happening for some of us here and now, in the US), under paying the locals for an ever increasing task list, buying into the local corruption (work networks of people who jabber in the same language while the stupid Americans who only know "Amer-English" just sit there), watching the native or rather American workers to be sure they stay "productive" while providing NO BENEFITS. It's like reading a novel that takes place in the 19th century, but is happening NOW.

[logicnazi]

Real Person:

The fact that people make profits and get rich by establishing business and employing workers in developing countries shows absolutely nothing. It's ridiculous attitudes like this that evaluate the morality of economic behavior by analogy to historical periods or interpersonal relationships instead of by their actual effect on people that are helping to keep the people in the developing world down.

I don't understand what makes this so hard for people to understand. What matters is whether the jobs you offer in the foreign country are BETTER than the options they have now not whether they have the sort of benefits Americans expect or make the same level of wages that we do. In fact it is DEEPLY IMMORAL to refuse to give people in the third world a slight boost in their standard of living just because you don't like the idea of paying low wages and not offering health care. Holding your nose up in the air and refusing to help people because you won't help them enough is utterly ridiculous.

China and India are pulling themselves up into the first world exactly BECAUSE companies from the US went there and employed people at low wages with few benefits so they could get rich. It would be the height of selfishness to deny other countries this same opportunity just because being associated with their plight makes you feel queasy. Sure, not everything we do is good, e.g., the requirements we add to our trade deals, but that's no reason to do even worse by these people. Besides, gaining some concessions to American industry is the political price we must pay to the American public to make sure we can continue to help the third world by outsourcing.

[Callahan]

Logicnazi, ridculous attitudes include those who would agree to pay a CEO $28 million for four months work.

Do you think those who demonstrate this kind of behaviour really give a damn about some third world country?

It's about money. Thats it. What Real Person said.