Preferential Trade Agreements

Douglas Irwin reviews Jagdish Bagwati's new book:

How Free Is Free Trade?: Bhagwati's 'Termites in the Trading System', by Douglas A. Irwin, Book Review, NY Sun: ...In "Termites in the Trading System," [Jagdish Bhagwati] argues that not all trade deserves our equal support, ... and mounts a brisk and spirited attack on preferential, so-called "free trade" agreements...

Why is one of the world's staunchest supporters of free trade protesting so passionately against this method of reducing trade barriers? ... The right way to reduce trade barriers, he explains, is on a multilateral basis and in a nondiscriminatory way. After World War II, America led the world in creating the General Agreement on Tariffs and Trade (GATT), which did just that... In recent years, however, countries have increasingly bypassed this system. Now, it is common for two or more countries to agree to eliminate tariffs and reduce other trade barriers for each other, but not for others... Under Bush, America has concluded ... CAFTA ... and a series of bilateral agreements with countries ranging from Oman to Australia, and — most recently and controversially — Colombia.

The main problem with these bilateral and regional agreements is that they exclude other countries. In Mr. Bhagwati's view, they are more accurately called "preferential" trade agreements because they discriminate against non-participating countries. ...

By introducing discriminatory treatment into the trading system, the movement toward preferential trade agreements sacrifices economic efficiency and, perhaps more troublingly, throws the carefully constructed postwar system into disorder. Instead of having one common multilateral system, ... Mr. Bhagwati ... has referred to this as the "spaghetti bowl" system, in which these agreements create a tangled mess of restrictions and regulations, ultimately disrupting rather than promoting free trade.

Mr. Bhagwati ... instead ... makes a strong case for opening trade much more aggressively at the multilateral level — with all-inclusive and nondiscriminatory agreements. ... There is little doubt that Mr. Bhagwati is right in his preference for multilateral and universal agreements, but he does not resolve the problem faced by those who support free trade ... and who may need to take a position on bilateral agreements...

As the Colombian example suggests, many "free trade" agreements are motivated by foreign policy considerations. ... An alternative hypothesis is that politicians are not seeking to enhance economic efficiency or improve the world trading system, but have other, political objectives in mind.

In the end, Mr. Bhagwati concedes that "halting the formation of [preferential trade agreements] is no longer a possibility." He pins his hopes on mitigating their adverse effects on trade by reducing overall trade barriers to such an extent that preferences and discrimination do not matter all that much. That in turn depends upon future unilateral efforts at trade liberalization and further progress at the WTO. ...

For more, see this recent post, or see Richard Baldwin's "Multilateralising Regionalism: The WTO’s Next Challenge." He argues, correctly I think, that the WTO must take an active role in turning bilateral and regional agreements into multilateral, all-inclusive, nondiscriminatory arrangements.

Comments

[hari]

WTO session started this morning and US delegate already tabled a motion which might not help much in moving the process to an end. She is demanding concessions on service and other industrial sectors from developing countries. It is a dead-end political ploy, I suspect, she is pursuing with a view to Congresional preferences for PTA/FTA.

Baghwati is right that if we don't get back to GATT format, WTO is more or less doomed to failure - there is no serious political movement for any consensus on issues currently on the table, including the Development Round under Doha.

[save_the_rustbelt]

This about about improving the economies of third world countries, and the finances of a international elite, on the backs of workers in developed countries.

The pinheads will be happy when every blue collar worker on the planet makes $6.00 an hour.

[save_the_rustbelt]

This about about improving the economies of third world countries, and the finances of a international elite, on the backs of workers in developed countries.

The pinheads will be happy when every blue collar worker on the planet makes $6.00 an hour.

Grumpy this morning - grrrr.

[btg]

The solution for the "spaghetti" problem would be for standardised agreements that go beyond the WTO but that could not be varied from this standard format - in effect, "WTO plus" - so that if the US wanted to sign agreements for even greater trade with other countires, the each of those new agreements would be identical, and if some of those countries entered agreements with, say, Canada or Japan, then those agreements to would be identical with the ones the US signed.

But frankly, as I have said before, the biggest trade issue going forward is the environment and dealing with CO2 and global warming - with some countries applying carbon taxes (or taking tough action) and others doing nothing, the only way to get countries like China and India on board is if their goods and services get penalised - in effect, we need to replace the WTO with a Green Trade Agreement - GTO - to be agreed upon by those countries that want to take action. The WTO countries would be split into two trading blocks and we would temporaily end up with some countries remaining in the WTO and trading with each other, and with the Green countries gving wTO access to each other but not to the thecountries opting out - after a phase in period.

[anne]

"But frankly, as I have said before, the biggest trade issue going forward is the environment and dealing with CO2 and global warming - with some countries applying carbon taxes (or taking tough action) and others doing nothing, the only way to get countries like China and India on board is if their goods and services get penalised...."

Why not just go to war?

[jamzo]

Bagwati's book has the potential to inform debate if his term preferential trading agreements begins to be used in place of the metaphor "free trade"

this would help keep the debate focused on the political nature of nation-to-nation trade agreements instead of philosophical screes about the merits of "free trade" versus ....

[bakho]

The main problem with these bilateral deals is attracting too many crony insider deals.

Does this explain why the US has moved from multilateral to bilateral deals?

[Cynthia]

Now if we can only figure out a way to deflate wages among the moneyed-elites so that they can join the rest of us to experience the joys of wage deflation, then we'll know for sure that we have finally reached free-trade nirvana.

[It looks like I've managed to out-grump Rusty this morning]

[kthomas]

Now now. Nobdoy out-grumps STR except sometimes anne, who's post has me a bit worried about her.

[John V]

Bhagwati is right on the mark. His book also sheds light on two separate positions that free-trade supporters get backed into needing to hold:

One of these positions is the pragmatic one in support of agreements like NAFTA and CAFTA. Such "preferential" agreements, as Bhagwati puts it, are not the best course of action. The problem is that it seems like the only politically feasible alternative since the other option is increased barriers. IOW, it's the lesser evil.

The other position, the preferred position of free trade supporters, is unilateral free trade whereby we simply drop all trade barriers to all countries and make no or few exceptions*. *(Those few exceptions could be in military/national security applications...though I'm personally not convinced that this is as important as some would say nor do I think it needs to be "legislated"). But this is a very small part of the larger puzzle and should not distract from the larger issue that we all know is the real matter at hand: Consumer goods and services and the related wholesale production of parts and ingredients to those end products and services.

The problem with staying steadfast and uncompromising in this second ideal position is that perfect becomes the enemy of good. During the presidential primaries, for example, Ron Paul stood against NAFTA and CAFTA. In doing so, he garnered eye-rolling from most "free-trade" supporters while getting misunderstood points from anti-trade groups and protectionists because his opposition to such agreements was not because he wanted protectionism but rather because he wanted what Bhagwati advocates. It's noble but unhelpful in the political arena unless the offer on the table is unilateral all encompassing free-trade policy OR NAFTA and other such bilateral or preferential agreements. In such a choice, the former is infinitely better.

[btg]

"Why not just go to war?"

All those ships sailing, airplanes bussing about, bombs exploding and buildings smoldering afterwards, will emit massive amounts of CO2 into the atmosphere, negating any benefit!

Plus, the US already has 2 wars to finish (more if you count the war on drugs, etc.)...

Jeez, this place is full of war mongers!

[Ken Houghton]

I assume Anne was being sarcastic. (She does that occasionally.)

"Aren't these agreements — such as NAFTA — almost invariably opposed by anti-trade groups precisely because they open up markets?"

Uh, no and no. Next stupid question.

[John V]

Ken,

Who are you quoting?

[btg]

i also assumed that Ann was being sarcastic...

[lonesome moderate]

Ken--you're not seriously saying that there were anti-trade groups that favored NAFTA, were you? The mind reels...

[btg]

""Aren't these agreements — such as NAFTA — almost invariably opposed by anti-trade groups precisely because they open up markets?"

anti-FREE-trade groups. few people will say that they are against trade, but these agreements tend to go beyond trade and transfer rights to corporations, away from democratically elected governments, and as such they undermine things like environmental laws, etc. - the agreements are more about the rights of investors than anything else.

Here in Canada, opposition to NAFTA has oftened focussed on things like Chapterr 11, rules that limit reviews of foreign investment and the posssibility that large scale diversions of water to the US will be forced upon us. No-one argued against the elimination of what few tariffs remained.

perhaps only the agricultural lobbies were "anti-trade" as such - include agri-business.

[Invisible Hand]

Bhagwati either has no understanding of real-world trade agreements or he is simply in favor of advancing the economies of protectionist Third World countries at the expense of Americans. (Having suffered through several of his other works, I suspect that both explanations are true.)
The GATT/WTO regime is heavily discriminatory against US products, while our Free Trade Agreements result in the mutual elimination of nearly all tariffs. Multilateralists are fortunate that the public doesn't realize that US exporters face ridiculously high (and often unbound) tariff rates in many of the non-FTA markets while our tariffs on imports are typically 0% to 5%. The discriminatory use of the Value-added tax is another particularly bad feature of the GATT/WTO system.