Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.
2. There are no new exclusive spheres of influence being created.
3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.
4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.
5. The proliferation of PTAs is taking place without any control whatsoever.
6. Large negotiating partners are favoured by the proliferation of preferential trading.
7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?

Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.

2. There are no new exclusive spheres of influence being created.

3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.

4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.

5. The proliferation of PTAs is taking place without any control whatsoever.

6. Large negotiating partners are favoured by the proliferation of preferential trading.

7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?

Alan Beattie and Anna Fifield in the FT on hard bargains:

Protests against imports of American beef, which have brought thousands of Koreans on to the streets, highlight problems with the White House’s policy of “competitive liberalisation”, or trying to bring down trade barriers worldwide by signing a flurry of bilateral and regional deals. With other leading economies also encountering difficulties in signing such pacts, are the wheels coming off the bilateral bandwagon?…

The administration of President George W. Bush has won the congressional votes approving each of its pacts. Yet bilateral deals allow trade lobbies to concentrate their fire, whereas they can struggle to make themselves heard in wider negotiations. This applies particularly to the US, which applies the same demanding model in each negotiation…

To win approval on Capitol Hill, sensitive sectors such as sugar and cotton need to be protected, while the main agricultural exporters, including beef and pork farmers, must gain in market access…

Most of the deals Congress has approved so far are with relatively small countries.

Securing even those agreements is becoming harder. The politics of trade in the US itself is also explosive, given widespread suspicions among the Democrats of the effects of trade and globalisation. A framework for trade deals between the congressional leadership and the White House, agreed in May last year and involving tougher rules on labour law and environmental standards, was enough to get through a deal with Peru. But the next agreement that came down the pipeline, a pact with Colombia, has caused the already sour relations on trade between the White House and Capitol Hill to turn poisonous…

Much of the White House rhetoric in the Colombia stand-off has been geopolitical, not economic… But whatever the motives, competitive liberalisation has ended up with the White House expending a huge amount of time, energy and limited political capital, including sending multiple cabinet secretaries on trips to Colombia, to pass a deal covering less than 1 per cent of US trade.

It would be extrapolating too much from the US experience to suggest that bilateral and regional trade diplomacy around the world has stalled. Some other big trading powers are having less difficulty negotiating agreements. But deals delivering deep and broad liberalisation, particularly involving developing countries, remain an endangered minority…

The EU’s attempts to negotiate collectively with Asean are meanwhile foundering on the near-impossibility of getting a broad and detailed agreement with a grouping of economies that range from one of the richest in the world, Singapore, to a least-developed country such as Laos.

More generally, economists say that differences in economic development and competitiveness mean that most intra-Asia trade pacts are currently generating more flows of talk and ink than movements of goods and services. They certainly are not adding up to serious advances for reciprocal liberalisation.

Prof Baldwin points at an unhelpful combination of sensitivities among the big three trading powers of east Asia. The collective positions of Japan, South Korea and China reflect the sum of their fears. “Japan and Korea won’t accept free trade in food if they sign with China; the Chinese are afraid of being locked into low-end manufacturing if they sign with Japan or Korea; and Korea is concerned at being squeezed competitively between Japan and China if it signs with Japan,” he says. “This combination has brought everything to a halt.” Japan and China are separately signing a flurry of bilateral deals with other countries around the region but many of these are limited in coverage…

it has also become clear that doing trade liberalisation step by step involves travelling a much bumpier road than at first appeared.

Most of those observations are already known to regular Trade Diversion readers, but it’s nice to see them appear in an extended FT analysis.

There’s a gap between trade preferences on paper and in practice. The preference margins have to be large enough that enteprises bother to use them. Remember Jagdish Bhagwati’s quip that Europe’s trading partners now enjoy least favored nation status?

In consequence, the EU’s MFN tariffs now apply only to five countries, with all others enjoying politically driven lower-tariff access under different terms to the EU under multiple PTAs, differentiated GSP (Generalized Scheme of Preferences), EBA (Everything but Arms) and other schemes. Evidently, MFN in the EU has now become LFN — the least favored nation tariff.

But practice differs:

Even so, in spite of the European Union’s expanding patchwork quilt of preferential arrangements, 74 percent of its trade remains on an MFN basis, according to the European Commission’s own estimates.

Will making US trade preferences for Colombia permanent attract new investment? That’s the White House line, echoed by Nick Kristof. I’m skeptical of the magnitude of the effect.

Jeff Schott at the Peterson Institute of International Economics edited a volume on US-Colombian trade relations a few years ago. He wrote:

An FTA would provide contractual guarantees regarding the permanency of the trade preferences, in stark contrast to the uncertainty that surrounds whether the US Congress will reauthorize the ATPA [Andean Trade Preferences Act] before it expires at the end of 2006. Such uncertainty imposes costs on bilateral trade and investment and has contributed to the lackluster FDI in Colombia by US firms… To be sure, other factors — including Colombia’s macroeconomic policies, security environment, and domestic regulatory policies — may be of equal or greater importance in investment decisions.

Oh, that nasty uncertainty.

Reuters – Feb 14 – Expiring U.S. trade benefits for Colombia, Peru, Ecuador and Bolivia would be renewed through the end of this year… The 10-month extension is a compromise between Democrats who had favored renewing the program for two years and Republicans, who wanted a much shorter renewal to keep pressure on Congress to approve a free trade pact with Colombia.

So Republicans are injecting uncertainty into Colombia’s export opportunities in order to use uncertainty as an argument for the PTA! Sick.

Back to Schott:

To an important extent, attracting investment is the key objective of the FTA. If implemented in conjunction with domestic policies that promote macroeconomic stability and enhance productivity, an FTA could make Colombia a much more attractive host for new investment not only by foreign companies but by Colombians as well…

In sum, the FTA should be seen as part of Colombia’s overall development strategy. Many of the reforms that will likely be required by FTA obligations may well parallel changes in domestic economic policies that were sought by the government but were blocked or diluted because there has been insufficient political support to gain legislative approval.

So the impact of the PTA will be largely contingent on domestic reforms in Colombia. And those reforms face political opposition. How is Colombia doing on those reforms?

Schott and Paul Grieco wrote:

In summary, 10 years ago, Colombia was the clear frontrunner in readiness for a free trade agreement, but today that is no longer the case. While Colombia has come through a turbulent decade without a huge decline in readiness, it has not moved up its readiness score to the levels of current US FTA partners such as Mexico and Chile. As is often the case, the political and economic domestic reforms that are essential to development are also required to leverage the benefits of a free trade agreement with the United States. While the indicators show that Colombia needs to increase gross savings and further reduce its external debt, promoting reforms that strengthen the political sustainability indicator will make the most important contribution to raising Colombia’s readiness score.

Political sustainability, huh? How is it going this week?

A political scandal that has engulfed Colombia’s political class came a step closer to the president, Alvaro Uribe, after his cousin and close political companion was arrested on charges of colluding with rightwing paramilitary groups.

I doubt this pleases investors:

Uribe’s allies are eager to see him serve a third four-year term, even though that is prohibited by the constitution. In 2005, the Constitutional Court approved an amendment that allowed him a single re-election in 2006. Many analysts here believe it is impractical for a tarnished Congress to try to amend the constitution or find other ways to spearhead another reelection effort…

Most of the politicians implicated in the scandal have had close ties to Uribe, and many of them supported the constitutional change that permitted him to run for reelection. Still, the “para-politics” scandal has touched politicians from nearly every party, including the opposition Liberal Party, which has more members linked to the paramilitary groups than any other.

I remain skeptical that this PTA will do much for Colombia in the near future.

Will making US trade preferences for Colombia permanent attract new investment? That’s the White House line, echoed by Nick Kristof. I’m skeptical of the magnitude of the effect.

Jeff Schott at the Peterson Institute of International Economics edited a volume on US-Colombian trade relations a few years ago. He wrote:

An FTA would provide contractual guarantees regarding the permanency of the trade preferences, in stark contrast to the uncertainty that surrounds whether the US Congress will reauthorize the ATPA [Andean Trade Preferences Act] before it expires at the end of 2006. Such uncertainty imposes costs on bilateral trade and investment and has contributed to the lackluster FDI in Colombia by US firms… To be sure, other factors — including Colombia’s macroeconomic policies, security environment, and domestic regulatory policies — may be of equal or greater importance in investment decisions.

Oh, that nasty uncertainty.

Reuters – Feb 14 – Expiring U.S. trade benefits for Colombia, Peru, Ecuador and Bolivia would be renewed through the end of this year… The 10-month extension is a compromise between Democrats who had favored renewing the program for two years and Republicans, who wanted a much shorter renewal to keep pressure on Congress to approve a free trade pact with Colombia.

So Republicans are injecting uncertainty into Colombia’s export opportunities in order to use uncertainty as an argument for the PTA! Sick.

Back to Schott:

To an important extent, attracting investment is the key objective of the FTA. If implemented in conjunction with domestic policies that promote macroeconomic stability and enhance productivity, an FTA could make Colombia a much more attractive host for new investment not only by foreign companies but by Colombians as well…

In sum, the FTA should be seen as part of Colombia’s overall development strategy. Many of the reforms that will likely be required by FTA obligations may well parallel changes in domestic economic policies that were sought by the government but were blocked or diluted because there has been insufficient political support to gain legislative approval.

So the impact of the PTA will be largely contingent on domestic reforms in Colombia. And those reforms face political opposition. How is Colombia doing on those reforms?

Schott and Paul Grieco wrote:

In summary, 10 years ago, Colombia was the clear frontrunner in readiness for a free trade agreement, but today that is no longer the case. While Colombia has come through a turbulent decade without a huge decline in readiness, it has not moved up its readiness score to the levels of current US FTA partners such as Mexico and Chile. As is often the case, the political and economic domestic reforms that are essential to development are also required to leverage the benefits of a free trade agreement with the United States. While the indicators show that Colombia needs to increase gross savings and further reduce its external debt, promoting reforms that strengthen the political sustainability indicator will make the most important contribution to raising Colombia’s readiness score.

Political sustainability, huh? How is it going this week?

A political scandal that has engulfed Colombia’s political class came a step closer to the president, Alvaro Uribe, after his cousin and close political companion was arrested on charges of colluding with rightwing paramilitary groups.

I doubt this pleases investors:

Uribe’s allies are eager to see him serve a third four-year term, even though that is prohibited by the constitution. In 2005, the Constitutional Court approved an amendment that allowed him a single re-election in 2006. Many analysts here believe it is impractical for a tarnished Congress to try to amend the constitution or find other ways to spearhead another reelection effort…

Most of the politicians implicated in the scandal have had close ties to Uribe, and many of them supported the constitutional change that permitted him to run for reelection. Still, the “para-politics” scandal has touched politicians from nearly every party, including the opposition Liberal Party, which has more members linked to the paramilitary groups than any other.

I remain skeptical that this PTA will do much for Colombia in the near future.

Will making US trade preferences for Colombia permanent attract new investment? That’s the White House line, echoed by Nick Kristof. I’m skeptical of the magnitude of the effect.

Jeff Schott at the Peterson Institute of International Economics edited a volume on US-Colombian trade relations a few years ago. He wrote:

An FTA would provide contractual guarantees regarding the permanency of the trade preferences, in stark contrast to the uncertainty that surrounds whether the US Congress will reauthorize the ATPA [Andean Trade Preferences Act] before it expires at the end of 2006. Such uncertainty imposes costs on bilateral trade and investment and has contributed to the lackluster FDI in Colombia by US firms… To be sure, other factors — including Colombia’s macroeconomic policies, security environment, and domestic regulatory policies — may be of equal or greater importance in investment decisions.

Oh, that nasty uncertainty.

Reuters – Feb 14 – Expiring U.S. trade benefits for Colombia, Peru, Ecuador and Bolivia would be renewed through the end of this year… The 10-month extension is a compromise between Democrats who had favored renewing the program for two years and Republicans, who wanted a much shorter renewal to keep pressure on Congress to approve a free trade pact with Colombia.

So Republicans are injecting uncertainty into Colombia’s export opportunities in order to use uncertainty as an argument for the PTA! Sick.

Back to Schott:

To an important extent, attracting investment is the key objective of the FTA. If implemented in conjunction with domestic policies that promote macroeconomic stability and enhance productivity, an FTA could make Colombia a much more attractive host for new investment not only by foreign companies but by Colombians as well…

In sum, the FTA should be seen as part of Colombia’s overall development strategy. Many of the reforms that will likely be required by FTA obligations may well parallel changes in domestic economic policies that were sought by the government but were blocked or diluted because there has been insufficient political support to gain legislative approval.

So the impact of the PTA will be largely contingent on domestic reforms in Colombia. And those reforms face political opposition. How is Colombia doing on those reforms?

Schott and Paul Grieco wrote:

In summary, 10 years ago, Colombia was the clear frontrunner in readiness for a free trade agreement, but today that is no longer the case. While Colombia has come through a turbulent decade without a huge decline in readiness, it has not moved up its readiness score to the levels of current US FTA partners such as Mexico and Chile. As is often the case, the political and economic domestic reforms that are essential to development are also required to leverage the benefits of a free trade agreement with the United States. While the indicators show that Colombia needs to increase gross savings and further reduce its external debt, promoting reforms that strengthen the political sustainability indicator will make the most important contribution to raising Colombia’s readiness score.

Political sustainability, huh? How is it going this week?

A political scandal that has engulfed Colombia’s political class came a step closer to the president, Alvaro Uribe, after his cousin and close political companion was arrested on charges of colluding with rightwing paramilitary groups.

I doubt this pleases investors:

Uribe’s allies are eager to see him serve a third four-year term, even though that is prohibited by the constitution. In 2005, the Constitutional Court approved an amendment that allowed him a single re-election in 2006. Many analysts here believe it is impractical for a tarnished Congress to try to amend the constitution or find other ways to spearhead another reelection effort…

Most of the politicians implicated in the scandal have had close ties to Uribe, and many of them supported the constitutional change that permitted him to run for reelection. Still, the “para-politics” scandal has touched politicians from nearly every party, including the opposition Liberal Party, which has more members linked to the paramilitary groups than any other.

I remain skeptical that this PTA will do much for Colombia in the near future.

“Competitive liberalization” is a really crummy strategy when you run out of steam at home, huh?

Paul Blustein, of the Brookings Institution, a liberal Washington think-tank, said the impasse was an understandable outcome of the Bush administration’s pursuit of bilateral trade deals such as the Colombia agreement, while multilateral talks have stalled.

“Maybe this time, we will finally learn that trade deals of this ilk can be a lot more trouble than they are worth,” said Mr Blustein. “The Colombia contretemps is the latest sign that the Bush administration’s policy of avidly pursuing such agreements with individual countries is prone to serious backfiring.”

Contrary opinions do exist.

The Economist writes:

Nevertheless Mr Bush has repeatedly made the case for the Colombia trade deal not on its economic rationale, but because it would help a Latin American ally in the war on drugs, and incidentally one whose next-door neighbour is that anti-American irritant, Hugo Chavez, Venezuela’s president.

Um, what is the economic rationale for the US-Colombia PTA? It gives Colombia no new access to US markets, so it can’t be aid consumers. It may aid some US investors who want access to the Colombian telecoms market and US agricultural exporters will enjoy some gains. But it’s hard to get excited about the economic benefits of this trade deal, and it surely can’t be the best place for an unpopular administration to expend its little remaining political capital with respect to international trade.

I don’t find the security story a particularly compelling reason to support the agreement either. I spoke with Dan Fisk, Senior Director for Western Hemisphere Affairs, on Friday about potential for the PTA to improve Colombia’s security situation. Fisk described the economic benefits for Colombia largely in terms of making permanent the preferential market access Colombia currently enjoys. He said that investors are more likely to make significant long-term investments when trade preferences are permanent, rather than subject to legislative renewal as they are under the Andean Trade Preferences Act. He also argued that investors have been moving to Peru, which does have a PTA with the United States.

While these effects are plausible, I question their magnitude. In the end, this PTA is largely symbolic — for both international relations and domestic politics.

The Economist writes:

Nevertheless Mr Bush has repeatedly made the case for the Colombia trade deal not on its economic rationale, but because it would help a Latin American ally in the war on drugs, and incidentally one whose next-door neighbour is that anti-American irritant, Hugo Chavez, Venezuela’s president.

Um, what is the economic rationale for the US-Colombia PTA? It gives Colombia no new access to US markets, so it can’t be aid consumers. It may aid some US investors who want access to the Colombian telecoms market and US agricultural exporters will enjoy some gains. But it’s hard to get excited about the economic benefits of this trade deal, and it surely can’t be the best place for an unpopular administration to expend its little remaining political capital with respect to international trade.

I don’t find the security story a particularly compelling reason to support the agreement either. I spoke with Dan Fisk, Senior Director for Western Hemisphere Affairs, on Friday about potential for the PTA to improve Colombia’s security situation. Fisk described the economic benefits for Colombia largely in terms of making permanent the preferential market access Colombia currently enjoys. He said that investors are more likely to make significant long-term investments when trade preferences are permanent, rather than subject to legislative renewal as they are under the Andean Trade Preferences Act. He also argued that investors have been moving to Peru, which does have a PTA with the United States.

While these effects are plausible, I question their magnitude. In the end, this PTA is largely symbolic — for both international relations and domestic politics.