How to construct your PTA

Michael G. Plummer has an article titled “‘Best Practices’ in Regional Trading Agreements: An Application to Asia” in the latest issue of The World Economy:

Given that regionalism in Asia and, indeed, the entire world is a ‘fact on the ground’, the main objective of this paper is to go beyond the traditional ‘building blocs versus stumbling blocs’ debate by underscoring the potential benefits of bilateral and regional agreements under the condition that they follow ‘best practices’, which we develop in Section 3. As an application of these ‘best practices’, we analyse existing regional accords between Asian countries and their regional and extra-regional partners in Section 4…

In fact, the economics literature, as well as the GATT/WTO rounds themselves, have placed far too much emphasis on tariffs. It is true that they are easiest to analyse (for economic models) and negotiate (for policy makers) but they are no longer the most important obstacles to international trade. In fact they have become increasingly irrelevant, and with them much of the standard ‘trade creation and trade diversion’ approach to estimating the worthiness of a regional trading agreement. According to the World Bank (2005, p. 66), the average tariff of NAFTA countries comes to approximately three per cent and that of AFTA slightly less than five per cent. Obviously, the effects of these FTAs, for better or worse, will ultimately not be decided by the usual net efficiency calculations. The economics of FTAs have become far too complicated, and generally speaking economic analysis and negotiators have often failed to keep pace.

In any event, the regionalism trend is here to stay. Regardless of the argumentative merits of the pro- and anti-regionalism camp, it is a ‘fact on the ground’ that preferential trading agreements, in particular FTAs, have been flourishing. There are myriad reasons behind this movement, with convincing economic, political-economy and strictly political arguments. But this does not mean that evaluating regionalism is the economic equivalent of counting how many angels can dance on the head of a pin. An inward-approach to regional economic cooperation could pose serious risks to the countries espousing them as well as to the international marketplace. Given that all major countries now subscribe to regional trading accords to various degrees, this suggests a threat that must be evaluated with continued vigilance.

A successful conclusion to the Doha Development Agenda would be very favourable to the global economy. With respect to the regionalism movement, not only would it, perhaps, strengthen openness rules on Article XXIV beyond the 1994 GATT Understanding, but it would also mitigate the effects of discrimination inherent in regionalism. However, not even a successful Doha will likely turn back the clock on bilateral and regional FTAs. Even if we leave aside the diplomatic and political-economy aspects of regionalism that tend to support the movement, there will remain salient economic influences that will continue to make bilateral, regional and plurilateral FTAs and other forms of regional economic cooperation attractive. Hence, it behoves economists to accept regionalism as a reality, and proscribe means to ensure that the trend be consistent with global market integration as well as being as efficient as possible in terms of minimising costs associated with this second-best commercial policy.