Bilateral trade treaties are a sham

Pascal Limy, the European commissioner for trade, recently wrote that ‘half the world's economists' were opposed to the epidemic of bilateral free trade agreements (FTAs). That was a splendid example of British understatement from a Frenchman. The fact of the matter is that nearly all scholars of international economics today are fiercely sceptical, even hostile, to such agreements. By contrast, politicians everywhere have succumbed to a mania that originated in Europe but is now eagerly promoted by Robert Zoellick, the US trade representative, with Asia - the last holdout - now joining in. We are witnessing possibly the biggest divide between economists and politicians in the postwar period. Unfortunately, the economists are right. The politicians' lemming-like rush into bilateral agreements poses a deadly threat to the multilateral trading system. There are three reasons. First, bilateral trade deals are undermining an essential principle of the World Trade Organization: that the lowest tariff applicable to one member must be extended to all members (the most favored nation status rule). Whilst it is true that the architects of the WTO General Agreement on Tariffs and Trade exempted free trade areas from the ‘most favored nation' (MFN) rule, they surely did not foresee that a proliferation of agreements would fragment the trading system. By the end of last year, 250 FTAs had been notified to the WTO. If those currently under negotiation are concluded, that number will approach 300. The result is a ‘spaghetti bowl' of rules, arbitrary definitions of which product comes from where and a multiplicity of tariffs depending on source. Second, if the Europeans started this fad, the Americans are now pursuing it with zeal, exploiting their hegemonic power and the lure of preferential access to a multibillion dollar market. Unlike Brussels, Washington has adopted bilateral FTAs to advance the agendas of domestic lobbies, agendas that are not related to trade. The US is using one-on-one agreements with small countries as models for other multilateral trade agreements, hawking them around the world as the ideal way to further trade liberalization. Third, America's tactic is weakening the power of poor countries in multilateral trade negotiations. Bilateral deals fragment the coalitions of developing countries, as each abandons its legitimate objections to the inclusion of extraneous issues in trade treaties. Having abandoned these objections in a bilateral deal with the US, how can those countries pursue them in WTO negotiations? The process of trade liberalization is becoming a sham, the ultimate objective being the capture, reshaping and distortion of the WTO in the image of American lobbying interests. The protection of intellectual property provides a good example of US tactics. Washington has used both inducements and punishments to secure its interests. During negotiations over the North America Free Trade Agreement, Mexico was told that the price of a deal was acceptance of intellectual property protection provisions. It was a price Mexico was prepared to pay. But the US has also demanded that other countries accept similar provisions or face retaliatory tariffs. Subsequently, during the Uruguay round of trade liberalization, the US was able to insert the trade-related intellectual property regime (Trips) into the WTO, even though no fully argued case had ever been made that Trips, which is about royalty collection and not trade, should be included. Mexico also had to accept provisions on environmental and labour standards annexed to the NAFTA treaty. But such standards were put right at the centre of the free trade agreement with Jordan, drafted in the last days of the Clinton administration. And with the Bush administration currently negotiating an agreement with Central America, Democrats are under pressure from the labour and environmental lobbies to demand not just the enforcement of local standards but higher standards altogether. In the free trade agreements with Chile and Singapore, the US Treasury insisted on inserting a ban on the use of capital controls, even though the International Monetary Fund has finally come round to the view that they might, on occasion, be justified. Chile and Singapore finally gave in, agreeing to a dispute settlement and compensation mechanism should such controls ever be used. Washington has thereby created another precedent. Thanks to the myopic and self-serving policies of the world's only superpower, bilateral free trade agreements are damaging the global trading system. They are undermining the most favoured nation rule ensuring equal treatment in the WTO. Bilateral deals have become a vehicle for introducing extraneous issues into the WTO for the benefit of narrow US domestic interests. They are thereby distorting the role of the WTO.

Question

1 Why are developed economies generally supportive of bilateral trade treaties?

2 Why are developing economies and their supporters often opposed to the use of bilateral trade treaties?

3 Carefully consider how this case study could be used by both critics of the WTO and by supporters of the WTO.