Regionalism is here to stay

I recently participated in a policy group discussion that considered the topic of preferential trade. Although most of us involved felt that PTAs were damaging to the global trading system, we weren’t offer to able many substantive policy proposals to remedy the situation. I could merely repeat the chorus that I picked up from Jagdish Bhagwati’s January 2005 FEER piece: If MFN tariffs go to zero, then discrimination is meaningless.

To the degree that PTAs hinder the progress towards free trade, that isn’t a very helpful prescription; it’s like saying that the cure for a disease is good health. Thankfully, more innovative policy proposals are beginning to emerge:

Three facts: 1) Regionalism is here to stay. A large fraction of the world trade is conducted under a motley assortment of free trade agreements and the list of agreements is lengthening at an accelerating pace. 2) This motley assortment is a poor way to run the world trade system and getting poorer. 3) The World Trade Organisation (WTO) has been little more than an “innocent bystander” in this process.

Two conclusions: 1) The WTO risks a serious erosion of its relevance if it continues in its “innocent bystander” role. 2) The WTO is probably the only international organisation that is well-placed to help tame the tangle of free trade deals at the global level; it is probably the only international organisation that has a clear incentive to do so.

This paper suggests some ways in which the WTO might help ‘tame the tangle’ of free trade deals by fostering a multilateralision of preferential trade agreements.

That’s the opening to “Multilateralising regionalism,” a brief policy essay by Richard E. Baldwin that he posted on his website this morning. It summarizes his 2006 World Economy Annual Lecture, which is also available online.

Opponents of preferential trade have been holding out and hoping that we might rollback the “competitive liberalization” strategy for too long. It should have become obvious sometime between Cancun and Hong Kong that we lost those political battles. The explosion of Asian FTAs was the nail in the coffin. Regionalism is here to stay.

I concede that I have been guilty of hoping that discriminatory trade practices were reversible rather than embracing the theory of the second-best and thinking about how to minimize the damage that PTAs do. It’s time to shift gears. In the future, my blog posts will highlight scholarship that acknowledges the undesirability of preferential trade and explores possible coping mechanisms or remedies.

Thanks to Richard Baldwin for starting that process. I’ll offer more thoughts on his paper later in the week.