13 Responses to “A Korean-American strand enters trade’s spaghetti bowl”

Comments

1. Robert Wade: A comment on Martin’s general assessment of bilateral-regional trade agreements as compared with WTO agreements and then a comment on the Korea-US one.

   Like most economists assessing bilateral-regional trade agreements, Martin assesses them on the assumption that the objective of trade policy is to maximize trade (and hence efficiency of resource use, on the [questionable] assumption that more trade produces more efficiency). Hence the central issue is “trade creation vs. trade diversion”, using a rather static notion of comparative advantage as the benchmark. 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 production – on the diversification and upgrading of production over time, especially in the case of the “southern” partner(s). Different rules of international economic integration – 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? Deep integration and industrial policy under multilateral and regional-bilateral trade agreements”, 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 (in tariffs, foreign direct investment, intellectual property, capital mobility, government procurement, etc). “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 the WTO’s multilateral rules do continue to give more “space” (than the bilateral-regional ones) for policy instruments aimed at changing comparative advantage. In the WTO 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. Though Martin may disagree with my rationale, we agree on the bottom line: the WTO deserves support, PTAs should in general be discouraged.

   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 issue of 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 of the agreement 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, being only too aware of growing sentiment in the US to “bring our troops home”, including from East Asia, at the same time as North Korea could explode on its doorstep and China-Taiwan could explode to the south. Also, of course, Korea – thanks in substantial part to strategic industrial policy through the 1960s to the 1990s, including managed and only slowly liberalized trade till the late 1980s – 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 (eg 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), combined with the higher priority those major economic states attach to meeting international financial obligations than to maintaining trade and economic growth. I’ll elaborate at a later time.

   Posted by: Robert Wade | April 4th, 2007 at 3:18 pm | Report this comment
   

2. Andre Sapir: Martin is right. The latest free trade agreement, this time, between South Korea and the United States, is a poor way to celebrate the 60th anniversary of the GATT which was founded on the principle of non-discrimination, a principle that carried much political and economic wisdom.

   A few years ago economists feared that the proliferation of free trade agreements would lead to a fragmentation of the world trading system into three blocs: a European bloc built around the European Union, an American bloc around the United States and an Asian bloc around China and Japan. It turns out that this scenario was wrong. Instead we are witnessing an even worse scenario: the development of bilateral free trade areas around three or four hegemons: the United States, the European Union, China and Japan. Why do I say that it is worse than the other scenario? Because within each regional bloc there would at least have been non-discrimination for all participating countries. Clearly a second-best compared to multilateral non-discrimination as envisaged by the GATT but certainly far better than a system of hub-and-spoke built around the three or four largest trading partners in the world.

   We know what will happen next. The European Union and Japan, and probably China as well, will demand that South Korea gives them the same deal that it has given to the United States. And Koreans will be pleased do so for two reasons: first it will decrease the trade diversion they incurring as a result of their bilateral free trade area with the US; second they will obtain something in exchange for opening their markets: preferential access to the European, Japanese and Chinese markets. This is exactly what happened after the creation of NAFTA. The European Union and Japan negotiated bilateral free trade agreements with Mexico in order to restore a level playing field with the US.

   You may ask: what’s wrong with this? Isn’t this a good deal that the US and South Korea have embarked on a free trade agreement that will lead to similar agreements between South Korea and the other trade giants? After all South Korea will suffer relatively little trade diversion this way and the trading giants will have further liberalised their markets. Who are the losers? The answer is simple: countries that have too small markets to be able to enter into similar deals either hubs like the United States or with spokes like South Korea. That means first and foremost developing countries.

   One of the rationales for the principle of non-discrimination is that it protects the small nations from abuses by the big powers. Unfortunately developing countries have been slow to grasp this simple idea and have preferred to cling to ’special-and-differential’ (S&D) treatment, which was meant to provide discrimination in their favour. The result is that no-one anymore champions non-discrimination: neither the developing countries who should but still dream of S&D, nor the big powers who draw competitive advantages from their ability to open their large markets to emerging countries such as South Korea and Mexico.

   And please don’t tell me that the free trade agreement between South Korea and the United States is ‘GATT compatible’ because it respects GATT rules that allow countries to enter into such agreements. These rules are close to meaningless since no free trade agreement has ever been declared ‘GATT incompatible’. What kind of test is it that no-one flunks it?

   Will an heir to Cordell Hull please rise and bring some economic and political sanity back into a system that needs it badly?

   Posted by: Andre Sapir | April 4th, 2007 at 8:57 pm | Report this comment
   

3. Fred Bergsten: Martin Wolf’s criticism of the newly negotiated free trade agreement between the United States and Korea is puzzling. He acknowledges that it will “deliver a substantial opening between the world’s largest economy and its 11th largest.” He argues that the downside of “trade diversion may be modest in this case.” He notes that “other countries will be desperate to avoid the adverse effects upon them,” which means that considerably more liberalization will be induced by the US-Korea deal.

   This last point is in fact decisive in countering Martin’s concern that such a bilateral agreement will have negative systemic effects. Japan and several other countries have already indicated their interest in emulating the US-Korea deal. This will produce a further substantial reduction of trade and other barriers, perhaps including between the two largest national economies in the world. US deals with Korea and Japan would then almost certainly compel other Asian countries, including China, to seek similar compacts. The most promising way to pursue them would be a Free Trade Area of the Asia Pacific, as already adopted for “serious consideration” by the APEC leaders at their latest summit last November and currently being studied in that organization. Serious movement toward such an Asia Pacific agreement would naturally galvanize deep anxiety in Europe and other parts of the world, and thus probably represents the best prospect for reviving the Doha Round and achieving the new installment of global liberalization for which I share Martin’s great enthusiasm.

   This process of “competitive liberalization” has in fact been the chief driving force of the highly successful global trading system for the past fifty years. The series of ever-expanding preferential arrangements enacted by the largest trade bloc in history, the European Union, catalyzed the three great multilateral rounds (Kennedy, Tokyo, Uruguay) to lessen its discrimination against outsiders. The negotiation of NAFTA, and even moreso the launch of the APEC vision of “free and open trade and investment in the Asia Pacific region,” in the early 1990s jolted the EU into successful conclusion of the Uruguay Round after a three-year stalemate.

   It would of course be neater and cleaner if global liberalization could be achieved in a simple and straightforward manner without going through the intermediate steps of bilateral and regional accords. But the revealed political economy of trade policy in all the major countries clearly indicates that parallel efforts on all these fronts are required to move the process toward the ultimate goal, which I believe all of us in this debate share, of global free trade.

   Martin is of course correct that bilateral and regional agreements entail costly rules of origin and other administrative complexities. But the “explosion” of these costs occurs only because of the far greater explosion of new trade flows, which produce substantial net welfare gains despite their associated warts. The expansion of trade generated by FTAs, at least those negotiated by the United States, incidentally turns out to be always far greater in practice than estimated by even the most optimistic analysts at the time the agreements are initially struck.

   Martin’s final concern, that bilateral deals like US-Korea and regional initiatives like the European Union and the Free Trade Area of the Asia Pacific will undermine multilateral efforts like the Doha Round, is simply incorrect. As noted above, they are much more likely to promote Doha than to divert attention from it. Empirically, the history of both EU and US trade policies demonstrates that they can comfortably pursue the several tracks of their competitive liberalization strategies simultaneously. The latest evidence is that the chief US negotiators conducted active discussions with at least three of their chief counterparts in the Doha talks on the same day that they were finalizing the bilateral pact with Korea. Martin Wolf and all other proponents of trade liberalization should rejoice rather than lament the successful conclusion of this latest step along the long and arduous path toward global free trade.

   Posted by: C. Fred Bergsten | April 5th, 2007 at 11:02 pm | Report this comment
   

4. Jagdish Baghwati: Martin Wolf is among the pioneers in foreseeing as early as 1987 the threat that Preferential Trade Agreements (PTAs) would pose to the World Trading System. He has written time and again on the theme, from new perspectives and in new contexts as a first-rate journalist of his extraordinary ability does. It is good therefore to see him returning forcefully to the same theme, but in the current US context. I would just like to add a couple of observations that strengthen his skepticism about the bilaterals and plurilaterals that the US is now pursuing.

   First, the current administration has never understood that PTAs can, and often do, undermine the multilateral freeing of trade. Under the influence of USTR Zoellick, who must be credited with launching the Doha Round, and of Fred Bergsten, the US has embraced the notion that the US can successfully walk on two legs: multilateral and bilateral, ignoring altogether the possibility that the US would wind up walking on all fours! The US has embraced the Zoellick doctrine of “competitive liberalization” which asserts that PTAs which exclude them threaten laggards (which, of course, are others and not the US) on multilateral trade negotiations into compliance. But the only alleged instance that Mr. Zoellick, and Mr. Bergsten, cite is the EU agreeing to close the Uruguay Round because the US activated APEC as a threat. But I have to meet a single important EU official who buys into this assertion. After all, the Europeans are not nitwits: APEC has not even now, after twenty years, become an FTA!

   Second, the bilaterals have now been captured by non-trade interests like IP lobbies, financial lobbies that do not want others to use financial controls during even financial crises, labour and environmental lobbies who wish to advance their agendas. All this can be done in the context of bilaterals where the US has a huge advantage vis-à-vis the other nation, usually weak and pliant towards making any concessions that the US demands for preferential access (which, in nay case, erodes over time while the non-trade obligations stay with you for ever). Bilaterals turn a trade game into a non-trade, a shell game. This cannot be done in multilateral negotiations: so you can well imagine which way trade liberalization will get biased once bilaterals are available.

   These, and several other, criticisms of PTAs have been developed at some length by me in a forthcoming Oxford University Press book titled Termites in the Trading System: How Preferential Trade Agreements are undermining Multilateral Free Trade, due out in December. Martin Wolf’s brilliant article makes a fine appetizer to what I hope is the entrée which my book will constitute.

   Posted by: Jagdish Bhagwati | April 6th, 2007 at 6:56 pm | Report this comment
   

5. Carla A. Hills, guest member: It is rare that I disagree with anything Martin writes. I must confess, however, I did disagree with the article published yesterday disapproving of the Korea-U.S. Free Trade Agreement. I think Martin overlooks some very substantial benefits that could flow from this agreement.

   First, all of us who believe in economic liberalization would like to see a broad and comprehensive multilateral agreement opening the markets of the 150 members of the World Trade Organization in the same manner as the United States and South Korea have agreed to open theirs. But that is not going to happen even with a successful Doha Round. It is for that reason that the WTO rules expressly permit bilateral arrangements that open “substantially all trade” among two or a few parties. It recognizes that greater liberalization achieved by a small group can serve as a model to advance later multilateral liberalization.

   This agreement is a good agreement. As Martin acknowledges “95 percent of bilateral trade in consumer and industrial products is to become duty free within three years with most remaining tariffs abolished within 10; South Korea is to liberalize access for many U.S. farm exports. . . U.S. service sector will be liberalized. . .intellectual property is to receive greater protection; government procurement is to be substantially opened up. . . .” And, Martin acknowledges that trade diversion is minimal. .

   In short this agreement unlike those that have been negotiated by other WTO members has few exemptions. It is one of the few efforts worthy of the name free trade agreement. And it goes much, much further than the most fervent optimist’s aspiration for the current multilateral negotiations.

   As a result, trade will expand between these two nations and stimulate economic growth with little diversion. That experience should help persuade Koreans, who have taken a highly defensive position in the Doha Round against agricultural liberalization, of the benefits of even broader liberalization.

   Also this agreement stands as a model for how other nations could open their markets to goods, services, procurement, and protect intellectual property just as the North American Free Trade Agreement did when the Uruguay Round faltered in 1992. Then the NAFTA not only stimulated more growth throughout the North American region, it also (1) encouraged the nations of the Asia Pacific to agree to a gradual opening of their economies; (2) persuaded the 34 democratically elected leaders of the Western Hemisphere to agree to negotiate a free trade agreement of the hemisphere, and (3) breathed new life into then stalled global trade talks. My hope is that the Korea-U.S. FTA will serve as a similar example.

   In addition to these economic benefits, this agreement creates a tangible bond across the Pacific that will work against our world splintering into three blocs (Asia, Europe and the Americas), which would not only impede global economic growth but also increase the odds of triggering global instability.

   So while the agreement may require entrepreneurs to assimilate some new “administrative complexity,” the benefits in my view vastly outweigh the burdens.

   Carla A. Hills was US Trade Representative under George H Bush 1989-93

   Posted by: Carla A. Hills | April 6th, 2007 at 7:20 pm | Report this comment
   

6. David Vines: It is good to see Martin Wolf’s piece on regional FTAs, and it is also good to see Fred Bergsten’s robust response to it. Fred’s views are important, because he has played a large part in inventing the US strategy of ‘competitive liberalisation’, which has led to the US Korea Free-Trade Agreement, announced earlier this week. He thinks that his strategy is the way forward. Like Martin, I think that we are in a mess because of this strategy. Let me explain why.

   All of us want to promote unilateral non-discriminatory MFN (or most-favoured-nation) liberalisation. This strategy was pursued by many countries in the Western Pacific in the nineteen nineties, and the result was a decade of achievement. And my own country, Australia, which when I left it in 1972 was inward-looking and protectionist, has been transformed by such a process of liberalisation. But MFN liberalisation is politically costly, because it is opposed by vested interests who stand to lose from the opening of domestic markets, and it is therefore difficult to bring about.

   This is what the WTO is designed to fix, and is why the Doha round matters so much to us all. The WTO is where liberalisers in a country can meet liberalisers from other lands. It is where these players can do deals on market opening, which they can take back home and use in their political battle with the vested interests who oppose domestic liberalisation. But the WTO, too, is in difficulty. There are now so many players, with so many different interests. And there are so many strategies, each designed to extract a maximum price for agreement. All of us, including Fred, want get to an agreement. But it is hard to know what to do next.

   A few years ago Fred stepped into this mess, along with former USTR Bob Zoellick, armed with his strategy of ‘competitive liberalisation’. Until a few weeks ago, one could argue that this strategy had gone exactly nowhere. Most of the US’s attempts to form free-trade agreements with large trading partners had collapsed. And the initiative for Free Trade in the Americas had foundered. Now, all of a sudden, an agreement has been struck with Korea. This will, as and when it is implemented, lead to a significant liberalisation of trade between the US and its 11th largest trading partner. Suddenly the strategy looks like it is up and running again. In taking this strategy seriously, we should perhaps give it a new and more accurate name, and I suggest ‘competitive discriminatory regionalism’.

   In his comment on this website, and in two Policy Briefs issued by the Peterson Institute for International Economics, Fred argues firmly that such a strategy, practiced by the US, is the best, and indeed the only, way to push us forward towards our shared goal of globally freer trade, on a non-discriminatory basis.

   Is this the ‘benevolent hegemony’ that we all really aspire to?

   First of all, it is important to observe that those who join a bloc with the US do not always get a very good deal, at least if their county is a smaller ‘spoke’ than is Korea. Fred’s Policy Briefs talk about the ‘high quality’ of the FTAs formed by the US (they are ‘gold standard’), and he describes the very large amounts of trade creation for which they are responsible. But this particular Australian notices that only in one footnote does Fred accept that these agreements ‘sometimes falter’. I should say that many Australians noticed long ago that sugar was left out of the Australian FTA with the US, and that beef has a long transition time (eighteen years, which is subject to snapback). In addition a number of Australians have looked over the 1200 pages of non-transparent rules of origin, and it seems to them that these rules were tailor-made for a particular purpose. These rules effectively prevent the agreement being relevant for many exports from Australia to US, particularly exports of those manufactures on which Australia has come to specialise, which are integrated into the beneficial ‘fragmentation’ of production in the Asia Pacific region, through which goods are increasingly assembled out of components coming from many countries. It is an empirical question, as yet unresolved, as to whether the US-Australia FTA is leading, in Fred’s words, to ‘an explosion of new trade flows…far greater than estimated by even the most optimistic analysts’. My Australian colleagues think that the opposite is happening. They have noticed, too, the significant upward pressure on drug prices which is now evident in Australia, as a result of the agreement. And they are aware of the economically indefensible extension of US monopoly power over intellectual property which has occurred in the film and publishing industries, again as a result of the agreement.

   Second, and more important, there are systemic effects of the policy of ‘competitive discriminatory regionalism’. Fred notes that Japan and several others have already indicated an interest in emulating the US-Korea FTA. This, he says, will ‘produce a further substantial liberalisation of trade and other barriers, perhaps including between the two largest national economies in the world’ (i.e. between the US and China). But he must ask himself the following two questions. First, would China wish to join a FTA with the US, and would domestic politics within the US make such an FTA possible? If not, might China, as a result of what is now happening, create its own system of discriminatory regionalism, which would exclude the US? If the answer to these two questions is ‘first no and second yes’ - as I think it is - then I think that we are in for a nightmare.

   Andre Sapir describes aspects of this nightmare in his article on this website. It is a prospect of global competition between two hub-and-spokes trading blocs, with the US and China as the hubs. Peter Mandelson announced late last year that Europe aspires to form a third hub. This would give us a world consisting of three, competitive, hub-and-spokes trading blocs.

   Such might be the rewards of ‘competitive liberalisation’. And would this provide a good position from which to conclude the Doha round, and future WTO rounds? I think not.

   David Vines is Professor of Economics at Balliol College, Oxford

   Posted by: David Vines | April 9th, 2007 at 5:38 pm | Report this comment
   

7. Fred Bergsten: Jagdish Bhagwati’s latest rant against preferential trade agreements (PTAs), which never even mentions the new US-Korea PTA that was the subject of Martin Wolf’s column, includes three factual errors that need to be corrected.

   First, he claims that I and other supporters of “competitive liberalization” can cite only the example of the Uruguay Round, which was successfully concluded when the EU came to fear that the APEC countries would proceed with a far-reaching PTA of their own in its absence, to support that thesis. Had he simply read my earlier contribution to this exchange, not to mention numerous previous publications, he would have recalled that the cardinal example is in fact the extensive iteration between the successive expansions of the European Union, by far the largest PTA in history, and the three great multilateral GATT rounds that he loves so dearly. He must address that demonstrated dynamic, as well as the likely impact of the new US-Korea agreement that I outlined, before he can so cavalierly dismiss the political economy of competitive liberalization.

   Second, Professor Bhagwati argues that multilateral trade agreements are immune from the pressures that he claims have now captured bilateral PTAs. His first example, however, is intellectual property rights, which were of course enshrined first and foremost in the multilateral TRIPS agreement in the Uruguay Round.

   Third, he worries that the United States will dictate PTA terms to “weak and pliant” trading partners. Since when is South Korea, the eleventh largest economy in the world, “weak and pliant?” Such a demeaning characterization would hardly apply to Japan, which is likely to be next in line. Professor Bhagwati should again consult the facts before reiterating his tired bromides.

   Posted by: C. Fred Bergsten | April 9th, 2007 at 7:41 pm | Report this comment
   

8. Martin Wolf: I am grateful to all those who have commented on my column on preferential trade agreements. The result has been an extraordinarily rich debate, which covers most of the underlying issues. My mind has not been changed. But my position is, I hope, now better informed.

   Readers will not be surprised to learn that I agree strongly with André Sapir’s comments. I think that the discrimination against small countries of which he speaks is indeed one of the great dangers with this approach to trade policy. I agree with Jagdish Bhagwati, too, on the implausibility of the argument that PTAs have accelerated the completion of multilateral trade rounds. I also agree that it is too easy for the US and other hegemonic powers to incorporate non-trade concerns, such as intellectual property, into these agreements.

   I remain, with him, one of the people who are strongly unconvinced of the value of the extension of the trade regime into these non-trade areas. This is more about rent-seeking than economic efficiency. Some of the developments in US intellectual property law, notably in copyright (extensions where they can have no bearing on creativity, for example) and patent law (patenting of business process methods, for example) are horrifying. I am terrified that these forms of rent-extraction will be enforced worldwide by use of US trade bargaining power, initially bilaterally. Similarly, in PTAs the US has imposed restrictions on countries’ abilities to impose capital controls. But, in certain circumstances, these are at least something countries should have available to them.

   David Vines makes the point that some of the deals that the smaller partners get are not good. His examples from the US-Australia deal are telling. I particularly commend his points on rules of origin (who can possibly know what the economic costs of 1,200 pages of non-transparent regulation are?) I believe that Fred’s “two largest national economies in the world” are the US and Japan, not the US and China, as David suggests. So his discussion of China’s regionalism may be moot. None the less, the potential for cross-cutting discriminatory trading blocs in East Asia and, indeed, the world, is large. Nobody can now have any idea how it is all going to end up.

   I find it painful to disagree with Fred Bergsten and Carla Hills. We are, after all very much on the same side, in the broader scheme of things. But I am unpersuaded by their arguments. This is partly for the reasons I have laid out above. I would add that there is no evidence so far that the Free Trade Area of the Americas or Free Trade Area of the Asia Pacific or Doha itself have been brought any closer to completion by these bilateral agreeements. Moreover, rules of origin are costly even if there is no increase in bilateral trade. Indeed, it is in those circumstances that trade diversion is likely to be particularly large.

   I really see no reason to suppose, most fundamentally, that the present bilateral process is a step on the way towards global free trade. I believe that one of the reasons Fred and Carla do not see the dangers is that they naturally view this whole process from the US point of view. I agree that bilateralism poses no threat to the US. It looks rather different from the point of view of many other countries, however.

   Finally, Robert Wade, as usual, defends what he calls “policy space”. It will be no surprise to readers that I do not fully share his concerns. But, in some areas, as I indicate above, I do, notably on some aspects of intellectual propertyt. I also agree with him that there are powerful non-trade reasons for US allies to reach such agreements. As he notes, neither South Korea nor Singapore would suffer as a result of doing so.

   Posted by: FT Forum - Martin Wolf | April 9th, 2007 at 9:55 pm | Report this comment
   

9. Fred Bergsten: One additional consideration of substantial significance needs to be included in the discussion of the US-Korea free trade agreement (FTA), and preferential trade agreements (PTAs) more broadly, triggered by Martin Wolf’s column of April 4.

   The United States is widely viewed as the driver of the competitive liberalization process, simultaneously pursuing bilateral and regional as well as multilateral agreements in an effort to achieve maximum reduction of trade barriers. The United States has indeed pursued such a policy for over twenty years, most explicitly and articulately during the current Bush Administration.

   It is not widely recognized, however, that the United States is also the recipient of considerable competitive liberalization pressures. Historically, the successively increasing discrimination toward outsiders of the European Common Market and its successors, by far the largest PTA in history, has been a central factor motivating the United States to take the lead in launching and successfully concluding the three great global trade rounds (Kennedy, Tokyo, Uruguay) in the GATT/WTO.

   Today, the clear intention of the countries of East Asia to form a regional trading bloc of their own is a major driver of US trade policy. It is probably the most important explanation of the US decision to pursue the new FTA with Korea, and its willingness to consider a follow-on FTA with Japan. It clearly motivated President Bush’s recent proposal to “seriously consider” the creation of a Free Trade Area of the Asia Pacific, endorsed by all 21 leaders at the APEC summit in Vietnam in November, that would embed any Asia-only compact in a broader Asia Pacific context that included the United States.

   Most importantly, the threat to US interests of Asia-only pacts and European Union deals with non-members (India? Mercosur?) is perhaps the strongest argument for Congressional extension of Trade Promotion Authority (TPA) for the President when it expires on July 1. Congress will surely realize that the abstention of the United States from all future international trade negotiations that would result from an absence of TPA, perhaps for a prolonged period, would not stop other countries from pursuing trade deals of their own that excluded the United States and discriminated against it. Indeed, such a US withdrawal would probably accelerate the prospects for such deals and the escalation of adverse effects on the United States.

   Hence the process of competitive liberalization works to promote constructive trade policies in the United States as well as elsewhere. It needs to be recognized, and consciously managed, to maximize this impact rather than disparaged as a hindrance to the more open world economy that we all seek.

   Posted by: C. Fred Bergsten | April 10th, 2007 at 7:29 pm | Report this comment
   

10. Joseph Francois (guest): In the Bergsten-Bhagwati exchange on “dictating PTA terms to weak and pliant trading partners”, Bergsten points to possible negotiations with Japan as making his case that the US is not negotiating with the weak and compliant. US-Japan talks do not preclude strong-arm tactics with third countries. I have in mind the tactics the US employed against Vanuatu, Tonga, and Samoa (certainly both weak and compliant) in WTO accession talks. Then again, their experience also proves that strong-arm tactics are not limited to bilateral agreements.

    Andre Sapir is right. I would worry more about the small countries that really are too small to actually be worth signing FTAs with at all. In addition, the Pacific Island experience points to an imbalance within the WTO, in addition to the one posed by a spreading web of bilaterals. There is a difference between the theory of MFN and the practice of accession and implementation in Geneva.

    In addition to the worry about small countries, I would also worry about bilateral deals leading to competing trade networks (I vaguely, and somewhat uneasily, remember old history lectures on colonial trading systems as an incubator for global military conflict). How does an emerging economic and military powerhouse (China) fit into a world of FTAs it does not belong to? (Imperial Japan felt justified in embarking on its military adventures in part because it felt a need to build its own trade block, as Europeans would not let Japan play in their own economic sandboxes.)

    If Bergsten is right, and we will soon start work on a Japan-US FTA, along with the likely EU-Korea FTA (and rumors of EU-U.S. discussions) then we have all major OECD economies linked up at least partially in a spider web of FTAs, right? Maybe it is time to talk about leveraging the intra-OECD FTAs through Geneva into some kind of OECD-based zero-tariff plurilateral for manufactured goods. I recognize this would be impossible for agriculture. Even so, at least it would force some of the current round of FTAs onto a path toward multilateral liberalization. (Though I can hear the trade lawyers from here: “But then we would not need rules of origin anymore, would we!?”) This could be MFN from the outset, or an open-membership side-agreement with easier conditions for the least developed countries. A model is the Information Technology Agreement. It would bypass the problem of finding a formula suitable for North and South economies in the current Doha Round negotiations, and if extended on an MFN basis to developing countries would give full access and eliminate the trade-cost aspects of rules-of-origin haunting preferential tariff schemes that, in theory, should be providing better access for developing countries. Just a passing thought…

    Joseph Francois is professor of economics at Erasmus University, Rotterdam

    Posted by: Joseph Francois | April 11th, 2007 at 10:51 am | Report this comment
    

11. Jagdish Bhagwati: Let me make just one point as your readers have access to my numerous writings on the issues raised by PTAs and will soon be able to read more systematically in my forthcoming book on PTAs and how they are undermining the multilateral free trade, titled Termites in the Trading System (Oxford). On Asia, also read the brilliant book by Christopher Dent which exposes the fallacy that somehow the spaghetti bowl of Asian FTAs will lead to, as Koichi Hamada said to me, into lasagna: that everything can be rationalized into an orderly FTAAP or an Asian FTA. I told him: while my culinary knowledge is negligible, I do know that lasagna cannot be made from spaghetti but needs flat pasta!

    Fred Bergsten seeks support for an APEC-wide FTAAP instead of an Asian FTAA (reflecting, say, ASEAN + 3). Many critics told him and Robert Zoellick [former US Trade Representative] years ago that the US focus on Mexico, and then on an FTAA with the Americas, would galvanize the Asians into their own regional FTAA; and that they would probably want to keep the US out of the Asian FTAA just the way the US had kept the Asians out of her FTAA of the Americas. A tit-for-tat, if you like. And that the US would be losing a seat at the banquet table in Asia, in an expanding region, and exchanging it instead for a seat at the less-sumptuous table in the slowly growing South America. But they would not listen. Now they do see this scenario as a distinct possibility. So, Mr Bergsten urges, even demands: do not divide APEC into an Asian FTAA, but have an FTAAP for Asia and the Pacific nations. What he means is: do not keep the US out. Mr Bergsten is being hoist by his own petard!

    This is where the South Korean FTA comes in. The South Koreans want, as Robert Wade correctly notes, the US presence as they feel sandwiched between a Japan they felt was wicked, and a China which they fear will be “when the time is ripe”. The US wants a pliant and politically weaker South Korea that will play for US inclusion in the ASEAN+ 3 type negotiations and even vote for FTAAP, as a quid pro quo. Hence, this Faustian bargain for yet another PTA in the spaghetti bowl. If all this undermines the multilateral trading system, so be it. After all, Mr Bergsten lives in Washington, not in Geneva, and plays by Washington interests.

    Posted by: Jagdish Bhagwati | April 12th, 2007 at 6:21 pm | Report this comment
    

12. Martin Wolf: I would like to add a brief comment to Fred Bergsten’s response to me of April 10th. I have little to add to the comments of Joseph Francois and the second set of comments from Jagdish Bhagwati.

    Fred is clearly correct that the formation of what is now the European Union – by far the largest preferential trade agreement in history, as he said – was a trigger for the Kennedy and Tokyo rounds and, albeit to a much smaller extent, the Uruguay round, as well. It is also plausible that the formation of an east-Asian PTA might encourage the US to put more emphasis on global liberalisation. Furthermore, I agree that the fact that other countries are considering PTAs is a factor in persuading Congress to grant the president Trade Promotion Authority. Finally, I accept that trade liberalisation, even in an unpleasantly discriminatory manner, is likely to be better than a resort to full-scale protectionism, which is a genuine danger.

    While I agree that the creation of the EU did stimulate global liberalisation, that was for three specific reasons. It was partly because the EU was a customs union, so there was no possibility of picking off individual members bilaterally; it was partly because the US had a policy of non-discrimination at the time, so ruling out a PTA with the EC as a whole; and it was partly because the EU was so big, which made some response essential.

    It is very far from obvious, to put it mildly, that the same dynamic would follow from most bilateral agreements or even most regional free trade agreements. I accept that the US-Korea agreement is likely to lead, in time, to a Japan-Korea, China-Korea and EU-Korea agreement. But I don’t see why it will lead to global liberalisation.

    If so, many less powerful countries will be excluded from the benefits. This will be liberalisation for the powerful and exclusion for the weak. Indeed even an east Asian free trade agreement might lead not to global liberalisation, but, instead, to EU-east Asia and US-east Asia free trade agreements. Again, that would exclude many smaller players. Alternatively, it might just lead to a host of bilaterals crisscrossing the world.

    Fred goes on to argue that the move to PTAs needs to “be recognized and consciously managed to maximize the impact rather than disparaged as a hindrance”. We know how to do this already, as I suggested in my original column. Instead of having a host of distinct bilateral agreements, each hegemon would offer a single PTA on standard terms. So the US would say that any country prepared to meet the full terms of, say, NAFTA or even this US-Korea agreement can join it. The EU might do the same for its agreements and so forth for any other potential hegemons (China, for example). Better still these hegemons would adopt common terms for such agreements so creating an open global PTA, as a form of “WTO plus”.

    I cannot see how a host of distinct bilateral agreements could meet Fred’s test. It is unlikely that most bilateral agreements would encourage global liberalisation, but rather even more bilateral agreements. Such agreements are also likely to create economic and other costs. Thus they fall very short indeed of maximising the beneficial impact of this approach to trade policy. PTAs that bring in wide regions or even a number of regions together would fall somewhere between the open PTA approach I mention above and the bilateralism I condemn.

    Posted by: Martin Wolf | April 18th, 2007 at 3:46 pm | Report this comment
    

13. Francis Mangeni (guest) contributor): Whether formation of regional trade agreements (RTAs) has assisted the initiation and breakthroughs in GATT and WTO negotiations can be a difficult question to answer; but officials who formulated the positions and negotiators who actually argued their national positions might be helpful in resolving the issues. This is so particularly because diverse political, social economic and trade considerations may all go into the formulation and argumentation of national positions at different points in time in accordance with the dynamics of the negotiations. Any breakthrough, moreover, any consensus, is the outcome of the agreement of all members, though the agreement of major players in the negotiations can be immensely helpful. Before developing countries become as active and effective as they now are, for instance during the Uruguay Round negotiations and the prior rounds, agreement would still be needed among the major players. A plausible position to take seems to be that various considerations, based on a reading of the political economy at that moment preferably in a holistic manner and taking into account envisaged developments, will go into the formulation of a negotiating position or a typical mandate to a negotiator.

    There could be some inherent difficulties with the argument that negotiation or conclusion of RTAs spurs deals at the multilateral level. RTAs that are cited as the reason for the deals, were negotiated or even concluded in many cases ahead of the multilateral negotiations. If the threat of initiating or concluding a regional trade agreement resulted in a breakthrough in multilateral negotiations, an argument could be made that the RTA was a significant factor; but it is difficult to make that argument when RTAs continued to be negotiated and concluded before or after the conclusion of the multilateral negotiations. Also, the argument could be made if the multilateral negotiations were meant to result in an outcome that was commensurate to the outcome from the RTA – if for instance, the tariffs resulting from the multilateral negotiations were meant to be as low as the tariffs for the parties under the RTA resulting from its conclusion. The argument to be made would be that non-parties to the RTA then engage in multilateral negotiations with renewed vigour in order to agree upon MFN treatment that is no less favourable than that which the parties have decided to accord each other under the RTA. Where this scenario is not the case, the response of non-parties should be to seek to conclude similar RTAs with the same or all the parties to the RTA if those parties to the RTA constitute major export markets. For instance, if Mexico or South Korea is a terribly important market for other countries, then the other countries should also seek to conclude RTAs in order to have treatment that is no less favourable than that accorded to the US under the RTA already concluded.

    I would like to make the following arguments.

    1. Regional trade agreements are likely to remain a permanent feature of the multilateral trading system, even when MFN rates go down to zero, or even were the WTO to adopt a decision prohibiting the formation of new ones. The main reason for this is that RTAs are formed to move ahead of the MTS, which deals not only with tariffs, but also with a variety of regulations of commerce where groups of countries can find a case for reduction of transaction costs and therefore for concluding the agreements. Perhaps more importantly, groups of countries will continue to conclude or to maintain their regional trade agreements out of political, historical, and social cultural considerations that usually form part of the broader deal concluded and might in cases not be explicitly written into the agreements signed.

    2. Ideally, regional trade agreements in the form of free trade areas or customs unions, should not have any more useful purpose when tariffs come down to zero and when, through trade facilitation, most regulations of commerce are no longer restrictive. As is well known, however, it is not entirely clear that all tariffs will any time soon come down to zero, particularly on some agricultural products. Also, regulations of commerce might continue to proliferate, with the different modes of doing business; or as protectionist devises if problems exports into even developed countries continue to face are anything to go by.

    3. The rationale for RTAs as components of the multilateral trading system contained in paragraph 4 of Article 24 of GATT, that they are desirable if they increase freedom of trade, may have been appropriate when GATT was concluded way back in 1947 among only 27 countries. This accommodated the calculations for the economic integration of Europe and, together with the grandfathering in the MFN clause, also took into account the preferential arrangements of Europe. This could not be the rationale for the very large number of RTAs now, the tangled web of restrictive regimes under RTAs, various inequitable North-South RTAs that seem to aim mainly at non-trade objectives or even hegemony.

    4. However, some North-South RTAs avowedly aim to support the social economic development of developing countries. Such RTAs could assist development if the stronger parties did not force odious deals upon the other party. Also, many South-South RTAs aim to build and consolidate regional markets and to promote interconnectivity including through concessions in services sectors. Discourse on RTAs could consider also the development aspects, particularly in the North-South and South-South RTAs, as integral components of increasing freedom of trade. There would appear to be international consensus now that freedom of trade by itself is not sufficient, in developing countries, but there should be adequate accompanying resources to assist develop their supply capacity and the trade-related infrastructure. It may not be the case that all developing countries or all groups of developing countries may be interested in RTAs for protectionist purposes – there have been genuine efforts in many developing countries to liberalise their economies, perhaps even far too fast in some sectors, over the last three decades or so. RTAs should be part and parcel of the effort for a fairer global order, particularly one that takes into account the development needs of developing countries. This might well be a credible case for RTAs now, for North-South and South-South RTAs, but without at all neglecting the need for progress at the multilateral level.

    5. Clear and fair disciplines will be required; but equally important, enforcement mechanisms will be required, including in assisting to ensure that North-South RTAs are not simply images of the geo political calculations and overbearing of our powerful countries.

    Francis Mangeni is regional trade policy adviser for the Commission of the African Union

    Posted by: Francis Mangeni | April 25th, 2007 at 7:29 pm | Report this comment
    

The FT Economists' Forum is a discussion among some of the world's top economists. As a general rule we accept comments from invited members only, but submissions from others will also be considered.

If you are a non-member submitting a comment, please include your relevant academic or financial background.

Post a comment

Name

Mail (will not be published)

As a final step before posting the comment, please type the two words you see in the image beloweight numbers in the audio clip; this test is to prevent automated robots from posting comments.

Type the two words: Type the eight numbers: Unfortunately you provided the wrong reCaptcha answer. Please try again: