Dr. Chris Dent of Leeds in the FT:

In my recent book, New Free Trade Agreements in the Asia-Pacific, I note how the current discussions within the Asia-Pacific Economic Co-operation (Apec) forum to establish a Free Trade Area of the Asia-Pacific (FTAAP) was also proposed at Apec’s Santiago summit just two years ago. It failed then as it will probably fail now because of the immense political and technical challenge of harmonising a large number of heterogeneous bilateral FTAs into a unified regional agreement. Most of the region’s technocrats and economists acknowledge this. It is a majority rather than a minority view.

Furthermore, disagreements over agriculture alone will ensure that the FTAAP is not realistically achievable for many years, if not many decades. Japan-South Korea FTA talks are still officially stalled over a disagreement on seaweed, and not just seaweed generally but a particularly type of it (gim seaweed). Agriculture has also unravelled many other recently initiated bilateral FTA projects in the Asia-Pacific.

A growing number of trade and political economists such as myself are becoming increasingly concerned about the proliferation of FTA activity and its impact on the international trade system. It is time to devote all trade diplomacy efforts to securing a WTO Doha round.

Advocates of an FTAAP generally suggest it as a means of pressuring the EU to return to the table at the WTO rather than as an agreement they would like to see actually implemented. But if “the FTAAP is not realistically achievable for many years,” can it be a credible threat?

The freshly launched European Centre for International Political Economy (ECIPE) has posted its first working paper, “FTAs and the Prospects for Regional Integration in Asia” by Razeen Sally (pdf). The paper surveys FTAs that countries in the region have pursued. Here are some highlights I found interesting:

The predictable results of foreign-policy-driven FTA negotiations light on economic strategy are bitty, quick-fix sectoral deals… These FTAs hardly go beyond WTO commitments, deliver little, if any, net liberalisation and pro-competitive regulatory reform, and get tied up in knots of restrictive, overlapping rules of origin. Especially for developing countries with limited negotiating capacity, resource-intensive FTA negotiations risk diverting political and bureaucratic attention from the WTO and from necessary domestic reforms…

It is already apparent that China’s FTAs are driven more by “high politics” (competition with Japan to establish leadership credentials in east Asia; securing privileged influence in other regions) than economic strategy. The latter is barely evident in China’s seeming readiness to negotiate (economically nonsensical) PTAs outside east Asia. This contrasts with China’s engagement in the WTO. In the latter, its approach is clearly linked to national economic policies that have a single-minded focus on growth. Commercial realities are front and centre in what China does in the WTO…

Thailand provides a better indicator than Singapore of FTAs in southeast Asia and beyond. Its FTAs have been rushed: careful preparation has been conspicuously lacking. Too many negotiations have been launched, and they have proceeded too fast. High-level policy direction to negotiators has been lacking… This trade-light approach has resulted in weak FTAs that will make little positive difference to competition and effi ciency in the Thai economy, but will create complications in the process (not least with a bewildering array of ROO requirements). The US-Thai FTA is likely to be the sole exception due to American demands for wide and deep commitments (though it will add to Thailand’s ROO noodle bowl). But negotiations have run into serious domestic opposition in Thailand, which threatens to derail them altogether…

India’s approach to FTAs outside south Asia is mostly about foreign policy, with little economic sense or strategy… The India-Thailand FTA is intended to be comprehensive, but is to date limited to an early-harvest that has eliminated tariffs on just 82 products, with very restrictive rules of origin imposed by the Indian government. ASEAN-India negotiations have also been bedevilled by India’s insistence on exempting swathes of economic activity and on very restrictive rules of origin for products covered…

Japan was the last major trading nation to hold out against discriminatory trade agreements, preferring the non-discriminatory WTO track instead. This has changed decisively in the past five years… The Japan-Thailand FTA is indicative of Japan’s overall approach to FTAs. It is a weak agreement born of mutual defensiveness. Thailand has long transition periods for phasing out tariffs in steel and auto parts; and it has exempted large passenger cars from the agreement. In agriculture, Japan has exempted rice, cassava, beef, dairy, sugar and some other products, and agreed to limited tariff liberalisation in other products. Rules of origin are very restrictive on agricultural and fisheries products – at Japanese insistence…

Japan calls its FTAs “economic partnership agreements” (EPAs) – to indicate that they go beyond traditional FTAs in goods and have comprehensive coverage of trade and investment-related issues in goods and services. That is misleading. EPAs are euphemisms for weak and partial FTAs. In essence, Japan seems to be reacting to China’s FTA advance, but without a real strategy…

APEC’s heyday was when it was a cheerleader for non-discriminatory unilateral and multilateral liberalisation in the early-to-mid 1990s. It has lost its way since the Asian crisis: its membership is too diverse and unwieldy for there to be any meaningful trade-policy consensus; its agenda has become impossibly broad and unfocused; and attention has shifted to bilateral and plurilateral FTAs (Scollay, 2001: 1144; Ravenhill, 2000: 322, 324-325). APEC’s vaunted Open (i.e. non-discriminatory) Regionalism is dead in the water; and these days it is driven by shallow conferencitis and summitry. It cannot be expected to contribute anything serious to regional economic integration…

The heart of the matter is that within and across south, southeast and northeast Asia, cross-border commerce is throttled by the protectionist barriers that developing countries erect against each other. The type of FTAs that are being negotiated do not presage a return to 1930s-style warring trade blocs. But they are highly unlikely to make a big dent in existing barriers and thereby spur regional economic integration. They might complicate east-Asian intra-regional production networks (the Factory Asia phenomenon), and distract attention from further unilateral liberalisation and domestic reforms. These FTAs have the hallmarks of trade-light agreements. Some might even come close to being “trade-free” agreements…

More fundamentally, trade policy matters more than trade negotiations. Governments in the region, however, are acting as if it were the other way round. They are relying too much on trade negotiations – particularly FTAs – while neglecting sensible trade-policy reforms at home. This is a reversal of pre-Asian crisis reliance on (non-discriminatory) unilateral liberal- isation. What might change this picture is the mind-concentrating effect of faster unilateral reforms in China and India – China in particular. The Chinese engine of unilateral freer trade might just induce a fresh spurt of liberalisation and structural reform elsewhere – but perhaps largely outside trade negotiations. Only with such market-based reforms at home do FTAs make sense – not least to minimise the effects of trade diversion.

Jagdish Bhagwati in the FT on APEC:

As the 21-member Asia-Pacific Economic Co-operation organisation (Apec) meets later this month (November 16) in Hanoi, the central question its leaders must confront is their response to the stalemate in the multilateral negotiations launched at Doha. Two options are competing for attention.

First, that Apec should continue to embrace “open regionalism”, acting as a forum where members undertake trade liberalisation in concert and extend it worldwide on a “most favoured nation” basis. Many in the region, led by Ross Garnaut and Peter Drysdale, the Australian economists, argue Apec should maintain this tradition and work actively for the cause of multilateralism by pushing for the conclusion of the Doha round.

Second, that Apec should instead launch a Free Trade Agreement of Asia and the Pacific (FTAAP), converting Apec into a “regional” free trade area…

The proposal to turn Apec into a free trade area runs into insuperable political and technical difficulties… Can anyone seriously believe that an FTAAP – requiring free trade among countries as diverse as China, Japan and the US – can be agreed more easily than Doha can be concluded?

Bhagwati never passes on the opportunity to deploy a metaphor:

These create what I have called the “spaghetti bowl” problem of criss-crossing bilateral agreements that create a chaotic system of discriminatory tariffs depending on source. Optimists such as Koichi Hamada, professor of economics at Yale University, believe merging them would turn the bilateral spaghetti into a (regional) lasagna. But lasagna cannot be made from spaghetti: it needs flat pasta! We would face the impossible technical problem of folding several FTAs together that have different tariff rates and innumerable rules of origin (often defined differently by product) for preferences to kick in.

Impossible technical problem or a tangle that may be tamed?

Pundits have an inexplicable love affair with preferential trade agreements. Doug Bandow advocates that the US and Taiwan negotiate a free trade agreement for foreign policy reasons. The economic arguments he tosses in are not compelling:

Taipei is America’s eighth biggest trading partner (and America is third on Taiwan’s list), with two-way trade running about $60 billion annually, and is a high-income consumer and high-technology producer. The U.S. exports more to Taiwan than to Australia, Chile and Singapore, all of which now enjoy FTAs.

Estimates of the likely increase in U.S. exports through an FTA run from about 15 percent to 30 percent. An FTA would position U.S. enterprises to take advantage of Taiwan’s ongoing transition toward a service-oriented economy.

The island, with widespread economic penetration throughout Asia, would provide a base for U.S. enterprises to expand their reach. More important, Taiwan’s proximity to China and increasing economic integration with the mainland would indirectly boost American ties with the PRC. Since Beijing views Taiwan as part of one China, U.S. firms operating in Taiwan and investing in Taiwanese concerns might find improved access to the larger China market.”

How is the fact that the US and Taiwan are already such active trading partners an argument in favor of a PTA? Isn’t that an indication that their bilateral trade barriers are relatively low? Moreover, where does that 15 to 30 percent increase in exports come from?

A US-Taiwan FTA would appear to be mostly trade diverting, not trade creating, primarily because the gains to Taiwan would derive almost entirely from increased exports of apparel, a sector in which the island’s production and exports have been declining for years in the face of competition from lower-cost producers… While preferential access to the US apparel market under an FTA would provide short-term economic benefits, it almost certainly would have adverse consequence for Taiwan’s long-term economic growth and welfare.

For the United States, the biggest anticipated gains from an FTA with Taiwan are in the auto sector, although these gains also would almost certainly reflect trade diversion.

As for economic integration with the mainland, why should we expect lower import tariffs and quotas to increase the number of “U.S. firms operating in Taiwan and investing in Taiwanese concerns”? It sounds like Bandow wants an investment agreement, not a trade deal, since I doubt that many US businesses will set up shop in Taipei to capitalize on the opportunity to export textiles and apparel to the United States. Moreover, as of May 2006 the deputy USTR wasn’t too enthusiastic about Taiwan as a route to the mainland:

Echoing positions long held by the business community, Mr Bhatia said globalisation required integrated cross-border supply chains, in which China played an increasingly important role. Against this background, Taiwan’s restrictions on the transfer of commercial technology, imports of certain goods from the mainland, cross-Strait travel, investment in China and direct transport links across the Strait put the island at a disadvantage, he said.

The economic case for a US-Taiwan FTA looks weak. I’ll leave the geopolitical issues to more qualified commentators.

Democratic electoral victories may turn Congress against free trade, but liberalization wasn’t going very far anyway, says Dan Drezner. While I agree that Doha is stalled and the FTAA has all but disappeared, I was surprised that Drezner considers the South Korea-US deal to be “a dead letter” due to the Kaesong complex.

It’s been evident from the beginning that the US Congress wouldn’t accept products from Kaesong and that the South Koreans would likely have to give in on that issue. Now, North Korea’s recent nuclear test has increased the geopolitical importance of achieving a trade deal, and South Korea’s ambassador to the US recently signalled flexibility on Kaesong:

Mr Lee hinted that South Korea could show new flexibility over Kaesong, its industrial park in North Korea. Although South Korea suspended humanitarian aid to the North after missile tests in July, critics say it has continued to pump cash into the regime through Kaesong.

“Because of North Korea’s missile tests and nuclear test the situation has become much more aggravated,” he said. “When we started these negotiations we wanted to include it [Kaesong] in the FTA but as time goes by we have noticed that the atmosphere has been shifting rather negatively against this idea.

“We know that,” he added. “That is why we are squeezing our wisdom to find some way out.” [FT]

So Kaesong isn’t an intractable barrier, it’s just one of many differences plaguing the negotiations. One of the largest hurdles is rice, which has made me skeptical of the deal’s chances for a while.

Jaime Granados and Rafael Cornejo are working to “tame the tangle” of preferential trade agreements by analyzing the CAFTA framework and making a number of suggestions:

Few regions in the world have seen such an aggressive proliferation of Regional Trade Agreements (RTAs) as the Americas. This decentralised and uncoordinated process is beginning to cause concern as it threatens to undermine efforts to build a hemispheric trading system. One of the most urgent tasks now facing trade policymakers in the Hemisphere is to analyse how the various RTAs might be made to converge, and the purpose of this paper is to act as a catalyst for such discussions. We have therefore explored how the issues raised by the coexistence of various dissimilar RTAs among seven different countries were resolved in the recently-negotiated Dominican Republic-Central America1 United States Free Trade Agreement (hereinafter ‘DR-CAFTA’ or ‘the Agreement’). This Agreement is a microcosm of what could be a broader negotiation process in the Americas, hence the usefulness of analysing its structure and the approaches used in its development.

By ‘convergence’ we mean the efforts countries make to ensure that theultimate goals of their trade agreements are consistent and, in particular, that they lead, in the most orderly fashion possible, to the creation of a hemispheric free tradesystem governed by common rules or at least by disciplines that ensure a minimum variation in regulations. Convergence efforts aim to avoid the fragmentation of the hemispheric trading system. They seek to align countries within a smaller and simpler framework of free trade disciplines, in the understanding that this process generates better results in terms of the public and private administration of trade flows and of the production apparatus. Given the status quo in the Americas, convergence could, in theory, mean several things: (1) replacing the multitude of existing instruments with fewer instruments; (2) reducing the complexity of existing regulations; (3) eliminating obsolete agreements and instruments; (4) harmonising the rules in the new agreements or the rules of pre-existing agreements; and (5) extending the membership of a specific trade agreement…

Convergence must be pursued at the hemispheric level. A number of imperfect CUs are operating in conjunction with a multitude of more shallow agreements (notably FTAs) in the Americas at the moment, and the real problem of the spaghetti bowl lies in the proliferation of these FTAs. Although there is a need to strengthen the CUs in the subregions of the Americas (to avoid extinction due to loss of relevance amidst competing integration projects), there is an even greater need to promote the convergence of the various FTAs.

The convergence of the FTAs is not only an urgent but also a highly complex issue. The proliferation of FTAs in the Americas is at the point of touching off a fragmentation of the hemispheric trading system, the effects of which are potentially highly negative. The issue needs to be urgently addressed so that this can be avoided before the interest groups become so entrenched that the task becomes unmanageable…

In the end, DR-CAFTA is not about convergence. It is about the accommodation of diverging trade axes and interests. The architecture employed and techniques used in the Agreement, however, may facilitate a new type of simpler agreement over the long term that may help to eradicate the main problems arising from the spaghetti bowl. Thus, convergence in the Americas is simply a process towards an end product or products that remain to be seen.

Despite the current impasse, for the sake of trade convergence in the Americas and for many other reasons, preventing the FTAA from becoming just another four-letter word is still a relevant endeavour. The seeds of a third generation of trade agreements in the Americas – the convergence generation – have already been sown. These agreements, which will require at least flexible trade liberalisation, some kind of origin accumulation among all the countries, and the harmonious coexistence of different origin regimes should already figure among the future plans of trade policymakers.

“Convergence in the Americas: Some Lessons from the DR-CAFTA Process” appears in the July 2006 issue of The World Economy.

Our results showed that the higher the value of preferences offered, the higher the probability that preferences are requested. Using endogenous threshold estimation techniques we also provided evidence that there exists a minimum value of preferences needed for traders to request preferences. More specifically, if the difference between preferential and third country tariff rates are lower than 4 per cent, there are no incentives for traders to request preferences since the costs of obtaining the preferences are expected to be higher than the benefits from obtaining the preferences.

Miriam Manchin – Preference Utilisation and Tariff Reduction in EU Imports from ACP Countries – World Economy – September 2006

Andrew Mitchell, Shadow Secretary of State for International Development, will be speaking at Cato on October 20th:

Africa is one of the most protectionist regions in the world. Most imports, including life-saving drugs and medical equipment, continue to be subjected to high tariff and nontariff barriers. Moreover, African countries impose some of their highest tariffs on goods from other African countries. African trade liberalization could increase intra-African trade by 54 percent. It is hypocritical for African leaders to call for greater access to global markets while rejecting trade openness at home. Andrew Mitchell will explain why African governments should support a Pan-African Free Trade Agreement if they are truly serious about the benefits of trade liberalization.

If African governments were serious about the benefits, they probably wouldn’t confine themselves to a continental agreement. Why are advocates of liberalization investing energy in this idea?

[Does that 54% increase in intra-African trade represent trade diversion or trade creation? No idea, as the context of the calculation is unclear in the policy brief by Marian Tupy, and he obtained the figure through personal communication with a World Bank author.]

I am excited to learn that Jagdish Bhagwati is working on a new book:

I am actually halfway through writing a small book titled Termites in the Trading System: How Preferential Trade Agreements are Undermining Multilateral Free Trade. It will advance many other ways in which the proliferation of PTAs is undermining multilateralism in trade.

I hope that he also invests considerable time in suggesting politically feasible solutions to clean up the spaghetti bowl. Regionalism is here to stay, and we need to do more than merely bemoan MFN’s erosion.

[HT: PSD]

Ernesto Zedillo: “Every additional PTA will become one more obstacle to the universal and non-discriminatory trade liberalization that the world needs. PTAs have been more easily hijacked by special interests groups and are not resulting in really good instruments… [T]he present deals are little monsters that will be much regretted in the future.”