Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Synopsis

Jagdish Bhagwati, an internationally renowned economist known for his insightful analyses and elegant writing, here shines a critical light on Preferential Trade Agreements, revealing how the rapid spread of PTAs endangers the world trading system. Preferential Trade Agreements, many taking the form of Free Trade Agreements, now number over 300 and are rapidly increasing. Bhagwati reveals how these agreements have recreated the unhappy situation of the protectionist 1930s, when worldtrade was undermined by discriminatory practices (today, ironically, as a result of a misdirected pursuit of free trade). The world trading system is definitely at risk again, the author argues, and the danger is palpable. Indeed, PTAs have created a chaotic system of preferences that has destroyed the principle of non-discrimination in trade. The trading system today is characterized by a blizzard of discriminatory barriers, each designed to favor some specific trading partner, so that we have what Bhagwati has called the "spaghetti bowl" problem. And while the big firms in the big countries can cope with the chaos, though at a cost, the author shows that small countries and small exporters are seriously handicapped. He also examines how FTAs are typically tied to extraneous issues such as openness to capital flows and inappropriate labor standards, so that the weaker nations, negotiating one-on-one with stronger nations, are forced to accept harmful demands unrelated to trade. Finally, the book warns that getting to multilateral free trade from the morass of PTAs will be almost an impossible task--like building a mansion from different-sized bricks. Preferential trade agreements, Bhagwati concludes, are not building blocks but stumbling blocks on the road of free trade. In Termites in the Trading System, he illuminates this growing threat to the world trading system. Acclaim for In Defense of Globalization: "If Mr. Bhagwati doesn't get a much deserved Nobel Prize for economics, he should get one for literature. His writing sparkles with anecdotes and delightful verbal pictures." --New York Sun "One of the world's leading international trade theorists.... Accessible and clearly argued. There is, one might say, a wealth of material on every page." --The Wall Street Journal "An outstandingly effective book.... Until further notice In Defense of Globalization becomes the standard general-interest reference, the intelligent layman's handbook, on global economic integration." --The Economist

Excerpt

Few phenomena and institutions in international economics have attracted as much attention recently as the formation of free trade areas (FTAs), customs unions (CUs), and less comprehensive, partial preferential reductions of trade barriers. These phenomena are inherently discriminatory: they reduce trade barriers for members of the trade agreements but not for nonmembers. They therefore directly contradict the principle of nondiscrimination in trade that many economists and policy makers have traditionally valued as the sine qua non of sound trade policy and an essential cornerstone of the architecture of an efficient, even a fair, world trading system.

Why has this come about? Why have these preferential trade agreements (PTAs) proliferated in recent years, creating a systemic havoc in the world trading system? What are the

1. I use the terminology of preferential trade agreements (PTAs) rather than
the earlier one of regional trade agreements (RTAs) simply because the PTAs are
not always regional in any meaningful sense. For example, the U.S.-Israel FTA is
not regional. But the RTA terminology still persists at the WTO, which is not
surprising since international bureaucratic and political usage often lags behind
reality; G-77 now has many more than 77 developing country members, for
example. Also, I do not use the terminology “bilaterals” because many PTAs are
“plurilateral”—an infelicitous phrase that sounds like, and is, jargon—and consist
of more than two, but less than all, nations as members.

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