What does the Asian FTA explosion look like?

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

20060719noodlebowl

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.

Regionalism is here to stay

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.

Cultural Protectionism: Korea’s Screen Quota

I don’t usually read the Huffington Post, but I stumbled across this post today while doing some research. In the midst of recommending appropriate caution about the US desire to include stringent intellectual property rules in upcoming preferential trade agreements with Malaysia, South Korea, and Thailand, James Love wrote this silly passage:

In the Korea negotiations one of the big demands by the US is to cut back the Korean “screen quotas,” that mandated theaters to show Korean movies at least 40 percent of the time (146 days per year). The US wants this cut back, so that Koreans will watch more Hollywood films. The creative community in Korean is highly mobilized in opposition to this, which they fear will devastate the Korean film industry. If the USTR “wins” this negotiation, it will reduce global cultural diversity.

Technically, “global cultural diversity” will be reduced if one defines that phrase to mean the supply of Korean films being shown in theaters, regardless of consumption. But more films that consumers actually want to see will be shown, so there will be a global cultural welfare gain. Moreover, if a culture’s existence depends upon governmental mandates impinging freedom of choice, why is it valuable?

Korean economist Kim Young-bong debunked the cultural protectionist argument a few years ago in the Joong Ang Daily. James Love ought to acquaint himself with the benefits of cultural hybridization through globalization rather than defending governmental discrimination.

Cato & PTAs

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.

The Political Economy of EU CAP Reform

This IHT article about the G8 meeting in Russia suggests that France remains a holdout:

Chirac said the United States should reduce agriculture subsidies and stop export aid. He said concessions made by the European Union trade commissioner, Peter Mandelson, on Oct. 28 were the most the 25-nation bloc could offer. Chirac also asked large emerging countries like Brazil, China and India to make “a significant effort.”

It’s not surprising that France is the most hostile opponent of reforming the Common Agricultural Policy. The nation receives three times the number of payments and twice the funds of any other European country. The top recipients are profiled here.

The Times article above alleges that many of the French recipients are politically powerful and connected to Chirac. That’s not obvious from this page, as the top recipients appear to be corporations. By the way, Fermes Francaises SA, the top French recipient, receives a pittance in comparison to some of the top UK beneficiaries.

To effectively tackle the issue, we need to highlight those corporations’ political connections, as well as other relevant political actors that have an interest in maintaining the CAP. In December, Richard Baldwin of the Graduate Institute of International Studies exposed (pdf) the British royalty as some of the biggest winners in a reverse-Robin Hood scheme. I’d like to see a similar investigation of the well-connected recipients in France.

What’s the best article you’ve seen on the political economy of the CAP?

WTO will evaluate PTAs

The WTO adopted measures on Tuesday to work through the backlog of PTAs awaiting evaluation:

Officials said it opens the way for clearing a huge backlog of some 200 regional trade agreements, or RTAs, many of which have been awaiting the WTO green light for a decade or more, and for fast action in accepting new ones.

“This decision will help break the current logjam in the WTO on regional trade agreements,” Mr Lamy said in a statement…

“Hopefully, this decision is a good omen for much-needed progress in other areas of the talks, such as agriculture and industrial goods trade, where agreement is urgently needed,” added Mr Lamy, currently travelling world capitals in search of a breakthrough on the Round.

This measure has little connection to those other areas and I see no reason for it to spur progress at the negotiating table.

The decision, reached in committee on Monday, provides for WTO economists to present an analysis of each agreement, with trade statistics, which will make it easier for smaller countries to determine how an RTA might affect their trade.

Until now, members have simply been presented with the often complex texts of such agreements.

Only one agreement – between the Czech Republic and Slovakia after the break-up of their former unified state in the early 1990s – has been approved in the last decade.

I raised this topic two months ago, and Ben Muse’s answer to my query on GATT Article XXIV compliance appears to have been correct.

Will the WTO acquiese to the proliferation of PTAs and greenlight all of them? Or will it try to strike some down?

New Stiglitz Book

Joe Stiglitz has a book forthcoming in September titled Making Globalization Work.

And he wants to involve the WTO in fighting global warming:

Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be… There is a simple remedy: other countries should prohibit the importation of American goods produced using energy intensive technologies, or, at the very least, impose a high tax on them, to offset the subsidy that those goods currently are receiving… Japan, Europe, and the other signatories of Kyoto should immediately bring a WTO case charging unfair subsidization.

Surely this can’t be the optimal policy tool to address the problem.