One of the most interesting parts of Richard Baldwin’s most recent paper (pdf) is his historical narrative arguing that, contrary to some critics’ notion that PTAs exploded onto the international trade scene in the 1990s, “multilateral and regional liberalisation proceeded in tandem since 1947.”

He uses this history to argue that regionalism can be structured to complement multilateralism. In regards to the Uruguay Round, Baldwin writes:

Plainly the 1980s show no sign of unilateralism, regionalism and multilateralism being substitutes. 1986 saw i) the Uruguay Round launched, ii) a major step in European regional integration (the SEA), iii) a major step in North American integration (CUSFTA talks). The juggernaut approach explains this by noting the reshaping of the political economic landscape induced by trade liberalisation in the 1970s would have lower resistance from import-competing firms to MTNs and RTAs while the expansion of export sectors would have raised political support for both. Moreover, European and North American regional integration, the SEA and CUSFTA, would bolster trans-Atlantic discrimination and this heightened the attractiveness of an MTN to both parties.

Some empirical evidence suggests that regionalism and multilateralism are substitutes at the tariff line level, however. In “PTAs as Stumbling Blocking for Multilateral Trade Liberalization: Evidence for the US,” (CEPR) Nuno Limao examines the Uruguay Round of negotiations and finds:

The U.S. multilateral tariff reductions in PTA goods were smaller than those in similar goods not imported from PTA partners. On average an exporter to the U.S. that did not belong to one of its PTAs received about 52% the benefit (in terms of price increases) if it exported any PTA good instead of a similar non-PTA good. This effect is even stronger if the good was exported by all PTAs or was an important export for a PTA partner.

He has another paper with Baybars Karacaovah that finds similar results for the European Union in the last two GATT/WTO rounds.

A story synthesizing these two arguments might suggest that preferential trade has negative impacts upon third parties, which causes them to seek multilateral liberalization. But these MTNs are more successful in liberalizing product lines where trade diversion did not occur. In this story, regionalism does some damage, but it spurs more trade creation than diversion by reenergizing the multilateral talks.

What other available empirical research might flesh out our understanding of the relationship between regionalism and multilateralism?

Alex Singleton:

It’s a good thing, therefore, that today progress is being on the Free Trade Area of the Asia-Pacific because, in the long run, that will help get the WTO back on track. As far as bilaterals go, it’s a good proposal because it takes the complicated spaghetti bowl of existing bilaterals and simplifies them…

The truth is that for the time being, the WTO is the Plan C for world trade, certainly for the next couple of years, and if the protectionist sentiments continue in the US Congress, much longer. President Bush lacks the political goodwill to regain trade promotion authority, necessary for a WTO deal.

Protectionist sentiments in Congress and a lack of political goodwill? Mr. Singleton’s Plan B is a trade deal with China!

Guy de Jonquieres thrashes “competitive liberalization” enthusiasts:

The Doha debacle has exposed that theory for what it is. In practice, bilateralism has fed off itself, intensifying the rush into preferential deals while draining energy from the Doha talks, polarising the US Congress and further diminishing its appetite for trade initiatives of all descriptions.

The belief that faster progress can be made in regional groupings than in the World Trade Organisation also defies abundant evidence to the contrary. Apec’s dreams of freeing by 2020 trade and investment in the Pacific rim remain dreams. Plans for a free trade area of the Americas are moribund. South America’s Mercosur is in trouble, as are its talks on closer links with the European Union. Disputes between the 10 members of the Association of Southeast Asian Nations have dogged their efforts to implement even limited liberalisation. South Asia’s plans for a customs union look like a joke, as they exclude trade between India and Pakistan. Regionalism’s only big successes are the EU and the North American Free Trade Agreement – and the former is too sui generis to be replicable.

Here it comes:

The initiative would be to establish a pan-Asian FTA – involving India, Australia, China, Korea, Japan and New Zealand, along with the 10 members of the Association of Southeast Asian Nations. “The participation of democracies like India and Australia would enable the region to forge more open economic partnerships,” Ministry official Hideyasu Tamura said.

Recall that the ASEAN nations negotiate separately, meaning that this pan-Asian FTA will look more like a series of bilaterals than a MFN-friendly APEC deal.

Joe Stiglitz and Hamid Rashid indict unilateral preferences for LDCS:

The US has already had some success in pitting the poor against each other. Preferential access for African countries, under the African Growth and Opportunity Act (AGOA) and more recent initiatives, seems to be largely a matter of trade diversion – taking trade from some poor countries and giving it to others. For example, Bangladesh’s share in US clothing markets declined from 4.6% in 2001 to 3.9% in 2004. During the same period, AGOA countries’ market share in the US clothing sector increased from 1.6% to 2.6%, and it is likely to increase further when AGOA countries start to take full advantage of duty-free access. [Project Syndicate]

I am less enthusiastic about their criticism of the EU, however:

A year ago, the leaders of the world’s richest countries committed themselves to alleviating the plight of the poorest. At Doha in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the “Everything but Arms” initiative (EBA), under which it was unilaterally to open its markets to the poorest countries of the world.

The opening was less than it seemed. The devil is in the details, as many less developed countries discovered that EBA’s complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products. [Project Syndicate]

First, rules of origin are a necessary feature of preferential trade. If the EU is to impose lower trade barriers upon LDCs than its richer trading partners, then ROOs will be part of the package. And it seems that all ROOs wind up being complicated.

Second, the devilish detail that LDCs face supply-side factors that constrain their exports means that preferential trade programs are unlikely to help. Rather than indicting the EU’s policy, this fact reduces their degree of guilt.

On the other hand, their argument against the US is damning:

The US ostensibly agreed to a 97% opening of its markets to the poorest countries. The developing countries were disappointed with the results of Europe’s EBA initiative, and Europe has responded by committing itself to dealing with at least part of the problem that arises from the rules of origin tests. America’s intention was, to the contrary, to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the US to select a different 3% for each country. The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, airplanes, computer chips of all kinds—just not textiles, agricultural products, or processed foods, the goods they can and do produce.[Project Syndicate]

Now that the WTO negotiations are taking a “time out,” as Pascal Lamy has characterized the suspension of scheduled talks, the attention of both analysts and policymakers will shift to bilateral and regional trade deals. The United States has eleven months to complete its FTAs before Bush’s trade promotion authority expires.

I’m told that, by law, the President is merely required to notify Congress of his intent to sign an FTA 30 days prior to voting on it (and therefore 30 days prior to the expiration of his authority). The actual, signed agreement can be submitted at any time. [UPDATE: There are additional notification obligations, which are outlined in this CRS report.] But for logistical and political reasons, the administration won’t abuse that flexibility by waiting until the last minute. It’s hoping to wrap up trade talks by the end of 2006 so that it can introduce legislation to Congress around March.

Talks are underway with Malaysia, South Korea, and Thailand, though the latter stalled earlier this year. Ben Muse has set up a page to track the development of the US-Korea deal. Estimates of the likelihood of completing these agreements on time vary.

Of course, there’s not much reason to worry about the timetable if Congress renews TPA. Richard Baldwin comments on my prior post, suggesting that Congress will not want to lose the “competitive liberalization” race with the EU and therefore will extend the president’s negotiating authority. Most analysts seem to be leaning the other way:

America’s top trade official says the collapse of global trade talks means the US presidential trade deal authority will now likely expire, before any WTO deal can be saved and sent to the US Congress… The last time the TPA expired in the mid-90s it took about eight years to renew it, which many pro-trade lawmakers fear could happen again, leaving the US unable to negotiate even bilateral deals. [abc.net.au]

The White House’s authority from the US Congress to negotiate trade deals expires next year. Most experts and officials think Congress unlikely to renew that authority, rendering any near-term agreement impossible. [Finfacts]

Without the so-called ’fast-track’ authority, which Congress is seen as unlikely to renew, Washington is in effect unable to negotiate international trade deals. [Reuters]

Of course, noting popular opinion without explaining why many people hold that view isn’t terribly convincing. Most newspaper accounts aren’t giving a very good account of the political factors in play.

I haven’t strongly committed to an opinion on the subject, but at this point I am not expecting TPA renewal. First, Jagdish Bhagwati previously commented that making progress at Doha was key to any bid for renewal so as to demonstrate to the Congress that value of granting TPA. Second, Chuck Grassley told Pascal Lamy it won’t happen.

What other evidence is available on this question?

One of the graphics that immediately pops out at you when you skim through Richard Baldwin’s new paper (pdf) is this:

As Baldwin commented back in May:

On paper, East Asian regionalism looks rather tidy…A very neat hub-and-spoke arrangement with ASEAN at the center… While this tidy description is attractive, the reality is quite different.

ASEAN has a rather unique method of negotiating FTAs. Every nation defines its own sensitive list. And preferences are only granted on goods that are on neither partner’s list. This means that the actual tariffs applied on any given good can be quite different for each of the 45 bilateral trade flows among ASEAN nations.

What this means is that AFTA actually should be thought of as 45 separate bilateral agreements, although of course the existence of ASEAN means that the 45 are coordinated to some extent. For the same reason, the China-ASEAN and Korea-ASEAN are likely to operate like 10 separate bilaterals with limited coordination.

Thus the real picture is marked by what might be called “the Noodle Bowl Syndrome”.

Many of those FTAs are still being negotiated. Even most of the already completed FTAs haven’t fully kicked in: real tariff discrimination will be phased in between now and 2010.

The liberalization that created the massive intra-regional trade we see today was mostly unilateral liberalization not preferential liberalization. East Asia has yet to see what real discriminatory trade liberalization means, but it is scheduled to find out soon.

Oh boy.

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.

In recent years, the Cato Institute’s Center for Trade Policy Studies has endorsed (pdf) the Bush administration’s “competitive liberalization” strategy:

Free-trade agreements deviate from the multilateral principle of nondiscrimination, and they can divert trade from
more efficient to less efficient but favored import producers. But under the right conditions, FTAs can inject new competition into our domestic economy, lowering prices for consumers and shifting factors of production to more efficient uses, while leveling the playing field for U.S. exporters.

“The possibility of trade diversion is not sufficient reason to reject the Bush administration’s policy of pursuing FTAs,” wrote Dan Griswold in 2003. But these days, Sallie James, who just joined CTPS in 2006, is sounding warnings about bilateral agreements:

Bilateral trade agreements between an economic power and a small economy country — such as the U.S.-Oman trade deal currently before Congress — are not of great concern. They don’t create much distortion in the world market, said James.
But if economic powers start making two-country deals with each other — specifically blocking out other countries and ignoring trade liberalization — serious repercussions could emerge.
“God help us all if the U.S. and Japan start doing bilateral agreements,” James said, “That will be a serious problem for the world economy.”

This might signal an increased sensitivity at Cato to the distortions induced by PTAs, or merely the likelihood of an increased ratio of trade diversion to trade creation in some of the trade deals that the US may pursue.

Korea’s chances of negotiating its FTAs with China and Japan were probably hurt by this comment:

The U.S. is a much better free-trade partner for Korea than China or Japan, where issues of race and historical animosities would make an agreement difficult, Korea’s chief negotiator in free-trade talks with the U.S. said Thursday. Kim Jong-hoon invoked “many sensitive issues such as racism, history distortions and territorial disputes” with China or Japan in response to the suggestion that the country should seek a free trade agreement with one of them first since their economies are smaller than the U.S.’ He was speaking at a forum hosted by the Korea Employers Federation.

But don’t look for the US negotiations to go much better:

Lee Myung-soo, vice minister at the agriculture ministry… “We will stick to our principle of not giving up the rice market in the free trade talks with the U.S.”

Half of the potential gains from a Korea-US FTA are in agriculture! The ASEAN-Korea deal is also held up by the rice barrier.

Don’t look for much progress on these Korean FTAs. But I’ve been skeptical from the start.