Earlier this week Martin Wolf had a column in the Financial Times on the shortcomings of the U.S.-Korea FTA. (I quoted from this story in a post on Korea's FTA: Trade Diversion). Wolf solicits comments from a pool of economists on his columns. There were several interesting ones this time: A Korean-American strand enters trade’s spaghetti bowl.
Robert Ward, of the Development Studies Institute at the London School of Economics, thinks bilateral FTAs are more likely to constrain the industrial policies of developing countries than multilateral trade reform implemented through WTO processes:
But one should... 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.
Andre Sapir sees the world economy dividing into big economy hubs with medium-sized economy spokes:
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.
Fred Bergsten of the Peterson Institute of International Economics and Jagdish Bhagwati of Columbia replay the argument over whether or not bilateral and regional agreements create incentives and motive power for multilateral agreements: Bergsten thinks:
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.
and Bhagwati disagrees:
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!
This Bhagwati argument is interesting:
...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.
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