Commentary

Bilateral Deals Are No Threat to Global Trade

By Daniel Griswold
August 7, 2003

The belated efforts of the US to sign bilateral agreements with Chile, Singapore and a few other small partners threaten, we are told, to destroy the entire trading system. A “selfish hegemon”, as Jagdish Bhagwati and Arvind Panagariya call it (Bilateral trade treaties are a sham, Financial Times, July 14), is conspiring with special interests to distort the global system. Such arguments themselves distort reality.

To begin, the US is hardly treading on new ground. The multilateral system makes room for free-trade areas through Article 24 of the General Agreement on Tariffs and Trade. The World Trade Organisation’s charter allows customs unions or free-trade agreements between members, recognising “the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of [those] countries”. More than 250 such agreements have been negotiated; if the Chile and Singapore agreements become law, the US will be party to exactly five.

Beyond their economic impact, free-trade agreements of the sort the US is pursuing can benefit the parties involved, the global trading system, and the world at large in many ways.

First, FTAs provide an important safety valve if multilateral negotiations become stuck — an all-too-real possibility. Since the Kennedy Round concluded in 1967, only two other comprehensive multilateral agreements have been reached: the Tokyo Round in 1979 and Uruguay Round in 1994. And because of the need for consensus, it takes only one of the 146 nations in the WTO to scuttle a new agreement. Given the history of multilateral negotiations, it would be unwise to put all of our eggs in the Doha Round basket.

Fears that FTAs will divert attention from the multilateral track are unfounded. The US government signed pacts with Israel, Canada and Mexico during the Uruguay Round negotiations from 1986 to 1994 without reducing its commitment to a final multilateral agreement. Robert Zoellick, US trade representative, is leading the Doha Round with proposals to liberalise global trade in manufactured goods, agricultural products and services.

FTAs can also level the playing field for US exporters put at a disadvantage by free-trade agreements that exclude the US. In Chile, for example, US exporters of wheat, soya beans, corn, paper products, plastics and heating and construction equipment have lost market share since its government began in 1997 to aggressively pursue free-trade agreements with its non-US trading partners. FTAs can also help less-developed countries lock in economic reforms. A signed agreement prevents nations backsliding in times of economic or political duress, assuring foreign investors that reforms mark a permanent commitment to liberalisation. So FTAs can serve as carrots to encourage the spread of political and economic freedom abroad.

Moreover, FTAs can provide useful templates for broader negotiations. As membership of the WTO grows, reaching consensus becomes more difficult. Negotiators can be forced to consider only the lowest common denominator. Negotiating with one nation or a small group of like-minded countries can allow more meaningful liberalisation in areas such as sanitary and regulations, technical barriers to trade, service trade and investment, electronic commerce, customs facilitation, labour and environmental standards and market access for politically sensitive sectors. Those talks can blaze a trail for wider regional and multilateral negotiations.

Finally, FTAs can spur the economic reform and consolidation within member states cited in Article 24. By encouraging regional integration, they increase economies of scale and create a more integrated production process. Consolidation may be most pronounced in more heavily protected service sectors such as telecommunications, financial services and transportation. More efficient industries and infrastructure can yield dynamic gains year after year, boosting growth, investment, and demand for imports from FTA partners and the rest of the world. Nafta is one reason why North America has been an engine of global growth in the past decade.

For all those reasons, the Bush administration’s FTA agenda is worth pursuing. Despite their peculiarities and incremental nature, the agreements can serve the cause of freedom and development by breaking down barriers to trade between nations.

Daniel Griswold is associate director of the Center for Trade Policy Studies at the Cato Institute.