Andrew Charlton and Joseph Stiglitz make a strong argument against preferential trade agreements on the basis of adjustment costs:

There is a high cost to the roundabout approach. For to the extent that there is temporary trade diversion, some industries are being temporarily encouraged, only to be later discouraged. Adjustment costs are typically high in developing countries; there may be significant costs of entry and exit, and with a scarcity of capital, the burden on developing countries may be particularly large. [Fair Trade For All: How Trade Can Promote Development, p.164]

Another arrow in the anti-PTA quiver.

The Commonwealth of the Northern Mariana Islands shares an ugly legacy with American Samoa: its quota-free and duty-free access to the US market resulted in tragedy. Just as in Samoa, Asian laborers were lured to work in the CNMI by entrepreneurs who then abused them. Preferential trade once again encouraged risky immigration that left laborers vulnerable to abuse, a harm that could have been prevented by a policy of non-discriminatory free trade.

Thanks to preferential trade (the EU’s Everything But Arms program), both rich and poor farmers oppose the EU’s move to liberalize its sugar regime:

Change was demanded of the EU after the WTO ruled earlier this year that its existing 40-year-old guaranteed pricing system was illegal. The WTO’s judgement followed a formal complaint from Australia, Brazil and Thailand.

These three countries will now benefit from a reduction in subsidised European sugar on the global marketplace, along with other smaller, and poorer, sugar producing countries in the developing world.

However, not all sugar exporting nations are happy at the changes. Some 18 sugar producing former European colonies with special access to EU markets will also now be affected by the guaranteed price cut, such as Mauritius, Barbados and Fiji. These so-called ACP countries (African, Caribbean and Pacific) have warned that their sugar cane growers will be less able to cope with the changes than European farmers.

Oxfam has called the EU’s agreement a “betrayal”, claiming it does not go far enough in helping sugar farmers in developing industries, at the same time as offering insufficient compensation for affected ACP members. [BBC]

My favorite piece on this topic is “Agricultural Liberalization and the Developing Countries: Debunking the Fallacies” by Arvind Panagariya [pdf]. See pages 11-12 for his comments on sugar and the EBA.

Charles Finny defends APEC from attacks by Eurocrats, arguing that the Asian organization has positively contributed to multilateral liberalization while the EU did little to help.

But the ongoing positive role Apec has played in setting and determining the content of the global policy debate in several important areas is constantly overlooked. The list of contributions is extensive. I want to focus on three areas: non-agricultural market access; environmental goods and services; and fish subsidies. In all three areas, Apec has either delivered meaningful results, or is seen as setting the way for any outcome likely to emerge from the WTO Doha Round. [Bangkok Post]

For an in-depth comparison of the two approaches, check out Europe, East Asia and APEC by Peter Drysdale and David Vines.

A story from last week:

Muslim countries have been urged to set up an Islamic common market as a way of boosting trade and development. The call came at the end of a three-day World Islamic Economic Forum held under the auspices of the Organization of the Islamic Conference (OIC).

The forum in Kuala Lumpur said the OIC’s 57 nations could gain economic clout internationally by signing an Islamic free trade agreement. At present, OIC countries’ collective GDP is less than 5% of the world total. Trading between OIC countries is worth about $800bn (£456bn) – no more than 7% of global trade as a whole. [BBC]

I don’t have enough time to post an in-depth examination of the proposal (as I’ve already procrastinated sufficiently on my grad school applications), but here are a few thoughts.

Why this agreement would be undesirable –

– As with all discriminatory trade, there’d be some trade diversion. Currently, trade within the bloc amounts to 13 percent of the grouping’s total trade, so there’s plenty of potential for diversion.
– Some member states — Indonesia, Malaysia, Turkey — are heavily engaged in the global economy, and they would certainly suffer some trade diversion.
– Member states might lose interest in the WTO negotiations. The Doha Round can’t afford to lose any of it already paltry momentum.

Why this agreement isn’t a serious threat to multilateral trade liberalization –

– A number of the Islamic participants — Algeria, Saudi Arabia, Somalia — aren’t WTO members. This is an alternative mechanism for international trade cooperation.
– It’s a non-hegemonic agreement – these countries aren’t determining whether the WTO talks go well or not. The EU and US will make or break the Doha round.
– The potential for trade creation likely outweighs the risk of trade diversion, as most of these economies aren’t heavily engaged in international commerce.

Why this agreement is even being proposed –

– The US has been neglecting Muslim countries in pursuing its “competitive liberalization” trade negotiation strategy.

The spaghetti bowl is getting quite thick. The follow partners are moving towards preferential trade agreements: Australia-Malaysia, Jordan-Russia, Chile-China, India-GCC, Thailand-Japan, Egypt-USA.

But while regionalism seems to be driving multilateralism into obsolescence, unilateral trade liberalization by China might overtake them both, argues Razeen Sally.

“The image I’d ask you to bear in mind is of China assuming the role that Britain had in the second half of the 19th century — in other words, China as the unilateral engine of freer trade that sets up competitive and emulative effects not least in the neighbourhood of South and Southeast Asia,” Sally told a conference organised by Beijing University and the LSE.

Excellent news, if it comes true. I’ve long preferred Chinese food to Italian.

Although CAFTA’s passage certainly depended upon last-minute horse-trading in Congress, it received plenty of support because the agreement will benefit US exporters. And as the US Trade Representative’s office proudly trumpeted, many of those benefits will be due to trade diversion: “Eliminating these tariffs will create in many cases preferences for U.S. exporters over third country suppliers, including those in Canada, Europe, and South America, helping to restore lost U.S. market share and expand overall U.S. exports.”

Celebrate CAFTA’s passage by reading Pravin Krishna’s classic paper on this topic:

Preferential trading arrangements are analyzed from the viewpoint of the “new political economy” that views trade policy as being determined by lobbying of concentrated interest groups. Two conclusions are reached: first, that trade-diverting preferential arrangements are more likely to be supported politically; and second, that such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement. The larger the trade diversion resulting from the preferential arrangement, the more likely this will be the case.

Maggie Xiaoyang Chen and Aaditya Mattoo are breaking new ground in the literature on preferential trade by exploring the topic of regionalism in standards:

Two factors explain the shift in regional negotiating emphasis away from conventional barriers and toward standards. First, multilateral negotiations have achieved remarkable reductions in tariffs and quotas but done relatively little to reduce the trade restrictive impact of technical barriers. Second, while multilateral trade rules governing regional agreement on tariffs seek at least in principle to balance the interests of integrating countries and the rights of excluded countries, the rules treat regional agreement on standards as always benign and worth of encouragement.

Are regional agreements on technical barriers indeed an unambiguous blessing for global trade? The voluminous research on regionalism with its almost exclusive focus on tariffs and quotas provide no adequate answer. This paper is a first step in the theoretical and empirical analysis of regional initiatives on technical barriers to trade.

I haven’t yet finished reading the paper, but it’s quite interesting thus far.

CAFTA’s congressional fight was a lose-lose situation. Either protectionists would succeed in promoting a general anti-trade message or CAFTA proponents would successfully pass a preferential agreement that would further warp the global trading system and only benefit the US thanks to trade diversion.

I had difficulty evaluating which type of loss might be worse for free trade in the long run. I’m still uncertain, but CAFTA passed yesterday, by a vote of 217 to 215, thanks to a lot of horse-trading.