Preferential Trade Agreements

Douglas Irwin reviews Jagdish Bagwati’s new book:

How Free Is Free Trade?: Bhagwati’s ‘Termites in the Trading System’, by Douglas A. Irwin, Book Review, NY Sun: …In “Termites in the Trading System,” [Jagdish Bhagwati] argues that not all trade deserves our equal support, … and mounts a brisk and spirited attack on preferential, so-called “free trade” agreements…

Why is one of the world’s staunchest supporters of free trade protesting so passionately against this method of reducing trade barriers? … The right way to reduce trade barriers, he explains, is on a multilateral basis and in a nondiscriminatory way. After World War II, America led the world in creating the General Agreement on Tariffs and Trade (GATT), which did just that… In recent years, however, countries have increasingly bypassed this system. Now, it is common for two or more countries to agree to eliminate tariffs and reduce other trade barriers for each other, but not for others… Under Bush, America has concluded … CAFTA … and a series of bilateral agreements with countries ranging from Oman to Australia, and — most recently and controversially — Colombia.

The main problem with these bilateral and regional agreements is that they exclude other countries. In Mr. Bhagwati’s view, they are more accurately called “preferential” trade agreements because they discriminate against non-participating countries. …

By introducing discriminatory treatment into the trading system, the movement toward preferential trade agreements sacrifices economic efficiency and, perhaps more troublingly, throws the carefully constructed postwar system into disorder. Instead of having one common multilateral system, … Mr. Bhagwati … has referred to this as the “spaghetti bowl” system, in which these agreements create a tangled mess of restrictions and regulations, ultimately disrupting rather than promoting free trade.

Mr. Bhagwati … instead … makes a strong case for opening trade much more aggressively at the multilateral level — with all-inclusive and nondiscriminatory agreements. … There is little doubt that Mr. Bhagwati is right in his preference for multilateral and universal agreements, but he does not resolve the problem faced by those who support free trade … and who may need to take a position on bilateral agreements…

As the Colombian example suggests, many “free trade” agreements are motivated by foreign policy considerations. … An alternative hypothesis is that politicians are not seeking to enhance economic efficiency or improve the world trading system, but have other, political objectives in mind.

In the end, Mr. Bhagwati concedes that “halting the formation of [preferential trade agreements] is no longer a possibility.” He pins his hopes on mitigating their adverse effects on trade by reducing overall trade barriers to such an extent that preferences and discrimination do not matter all that much. That in turn depends upon future unilateral efforts at trade liberalization and further progress at the WTO. …

For more, see this recent post, or see Richard Baldwin’s “Multilateralising Regionalism: The WTO’s Next Challenge.” He argues, correctly I think, that the WTO must take an active role in turning bilateral and regional agreements into multilateral, all-inclusive, nondiscriminatory arrangements.


Originally published at Economist’s View and reproduced here with the author’s permission.