Brookings’ Joshua Meltzer takes an extended look at the future of the global trading system (html / pdf / event). The introduction is a good overview of the status quo’s challenges, though knowledgeable observers will find plenty of room for disagreement in assessing the shape and magnitude of various obstacles (e.g. the bicycle theory of trade negotiations, PTAs’ diversion of attention from multilateral talks).
The discussion of WTO legitimacy at the end of the piece is very interesting, though I won’t focus on it in this post. (More on that subject can be found in this Oxford book on trade ethics.)
In the middle of the article, Meltzer hints at an argument that has perhaps not received sufficient attention:
For the United States, the European Union, China, and Japan, bilateral and even regional FTAs maximize their ability to get their own way. Were these outcomes to become templates for future multilateral trade rounds, then a two-level game that leverages FTA outcomes into the WTO might undermine the WTO’s legitimacy.
One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare. (This scenario would be most damaging if technical standards are to be harmonized, but it also highlights the difficulties of harmonization. If mutual recognition is the future of reconciling technical barriers to trade, then the scope for first-mover advantages may be reduced.)
Using tariff line data for the 20 largest importers, Theresa Carpenter and Andreas Lendle estimate that only 16.3% of global trade flows are given preferential treatment. (That estimate is an upper bound since they don’t observe preference utilization and therefore measure eligibility.) That seems small, and the authors conclude that “there is not much trade with high preferential margins.”
On the other hand, “on aggregate, preferences reduce the global trade-weighted average tariff from 3.2% to 2.1%.” (Their calculations don’t account for the endogeneity of trade volumes, so these 1.1 percentage points probably overstate the preferential margin. But remember that trade-weighted average tariff measures underestimate protection, so we’re taking the difference of two fuzzy numbers.) Policies equivalent to 1/2 of remaining global tariff barriers strike me as big. (Though tariff barriers are never big when compared to non-tariff barriers like labor mobility restrictions!)
Daniel Altman makes (what I believe is) a novel claim:
Already, we’ve seen rich and poor countries shifting their attention to regional trade deals. Diverse groups of countries can do a lot by trading amongst themselves, exploiting differences in costs, resources, and technologies. Pretty soon, we should see a few large regional blocs dominating global trade. The ones that lower trade barriers faster will grow faster, too. In these cases, the poorer countries would be expected to catch up to the richer ones. When that happens, the wealthier blocs will start to look at the blocs that lagged behind for new trading relationships, and the barriers will start to fall between the blocs. In the end, we’ll have something very close to a global trade deal – and we will have arrived at that deal in a much more organic, economically efficient way. [emphasis added]
Yes, preferential trade is an importance force shaping the WTO talks. Yes, preferential trade is more politically palatable than multilateralism. But more economically efficient?
Most who are relatively optimistic about the dynamics of preferential trade don’t claim it’s the best path (Baldwin: “(1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agreements; (2) this motley assortment is not the best way to organise world trade”). How would large trade blocs be more economically efficient than a global trade deal?
Rosa Whitaker, who helped create the African Growth and Opportunity Act (AGOA) as assistant USTR for Africa under President Clinton, thinks that AGOA may not be renewed.
Instead, the idea gaining currency in Washington is a version of trade preference reform in which Agoa-like benefits are extended to all “least developed countries”, leaving Africa with no exclusive trade benefits and SA [South Africa], with its middle-income status, completely out of the loop.
Though a relaxed rule of origin for fabric inputs will expire at the end of 2012, AGOA won’t expire until 2015, so I think it’s a bit early to be sounding alarm bells. The US is supposed to strike a Doha deal in the meantime, for example.
Yesterday, President Obama said at the Chamber of Commerce:
We finalized a trade agreement with South Korea that will support at least 70,000 American jobs. And by the way, it’s a deal that has unprecedented support from business and labor, Democrats and Republicans. That’s the kind of deal that I will be looking for as we pursue trade agreements with Panama and Colombia, as we work to bring Russia into the international trading system.
Keith Hennessey, Director of the NEC under President Bush, says:
The problem is that the U.S. already has trade agreements with Panama and Colombia. The President is in reality saying that he is undoing those deals… When President Obama arrived, he said the South Korea FTA negotiated during the Bush Administration was a bad deal for the United States. Rather than submitting it to Congress for approval, he directed his USTR Ron Kirk to renegotiate certain parts of it with the Koreans… We see from yesterday’s remarks that the President wants this to be the model for future trade agreements. This gives labor unions and their Congressional allies tremendous leverage to water down or even block FTAs they don’t like.
That’s one interpretation of the remarks. It’ll be interesting to see what the administration actually does on trade going forward. Given the relative economic unimportance of these PTAs, I think the efforts to wrap up the WTO’s Doha negotiations this year may be more interesting.
An ADB report summarizes surveys of firms about their preference utilization under Asian PTAs:
ADB conducted firm-level surveys in six countries, the results of which are published in the book Asia’s Free Trade Agreements: How is Business Responding? Experts in the region looked at the issues using firm surveys in Japan, China, Korea, Singapore, Thailand and the Philippines.
This book asks four important questions concerning the spread of FTAs and the Asian noodle bowl: Are FTA preferences being used by firms? What are their costs and benefits? Are multiple ROOs a burden to business? Is there enough business support for firms to use FTAs?
Lucio Vinhas de Souza in a World Bank note:
This note provides an initial estimation of some of the economic effects of creating the Eurasian Economic Community (EurAsEC) customs union. Relying on the computable general equilibrium model from the Global Trade Analysis Project (GTAP), results of the simulations consistently support the conclusion that, as an arrangement, the EurAsEC customs union would be a GDP-reducing framework in which the negative trade-diversion effects surpass positive trade-creation ones.
Timely analysis of the modifications to the US-Korea trade deal (pdf) from the Peterson Institute’s Jeff Schott:
In economic terms, the overall impact of the new deal differs little from the old deal. Changes in the tariff schedules reduce the overall benefits of the trade pact but not by very much. Immediate tariff cuts on autos and light trucks have been deferred a few years, but changes in Korea’s regulatory policies and procedures on autos should help mitigate existing problems and preclude the introduction of new nontariff barriers to US exports to Korea…
Under the new agreement the US car tariff, currently 2.5 percent, will be maintained for four years (i.e., until January 2016) and then eliminated. In turn, Korea slowed its own tariff reform… In addition, the US tariff on light trucks, which has been 25 percent since the infamous 1963 US-Europe chicken war, will be maintained for seven years (until 2019) and then phased out over the next three years. Originally, the light truck tariff was to be phased out in 10 equal annual increments…
Do these changes in tariff reforms make much of a difference? Probably not—and definitely not if the Doha Round agreement concludes and begins to cut most-favored nation (MFN) tariffs starting in January 2013, the likely start date if a WTO deal is reached by early 2012… US light truck tariffs would be phased down from 25 percent to 6.1 percent in 2019. So for light trucks, the US MFN tariff would be lower than the KORUS preferential tariff beginning in January 2014.
(Updated 6 Dec 2010, 7pm.)
The US-Korea PTA is back on the table, as US automakers won some concessions from South Korea:
The new supplement agreement allows 25,000 cars per U.S. automaker to qualify for entry into the South Korean market based on U.S. safety standards. That is about four times the amount agreed to under the deal struck in 2007.
It also allows the United States to keep a 25 percent tariff on trucks until the eighth year, instead of beginning to reduce it in the first year. The United States will still have to eliminate the duty in year 10 of the pact.
South Korea is no longer required to eliminate immediately its 8 percent tariff on U.S. auto imports, but will reduce it to 4 percent for four years before eliminating it.
Seoul will still immediately eliminate a 10 percent tariff on U.S. trucks under the revised pact.
South Korea was given an additional two years — until 2016 — to eliminate duties on some U.S. pork products.
The deal needs to be ratified by the Korean National Assembly and the US Congress. Last month, Jeff Schott said that the deal could still be “fast tracked” to Congress because it was signed by President Bush before his trade promotion authority expired. I do not know if yesterday’s revisions (“supplement agreement”) also qualify under the old TPA or if the revised PTA will be subject to Congressional amendments.
UPDATE: Reuter’s Doug Palmer says that White House and USTR both say the revised deal is eligible under the old trade-promotion authority.