Preferential Trade Agreements: The Wrong Road
Bhagwati, Jagdish, Law and Policy in International Business
At the Conservative Party annual meeting in Blackpool in 1995, British Prime Minister John Major invoked George Orwell in his radical youth, when he went by his given name of Eric Blair, to tweak Labour Party leader Tony Blair as having changed everything except his name. I would like to invoke the later George Orwell and begin by suggesting that the widespread usage of the term "free trade agreements" (FTAs) to describe what are really preferential trade agreements (PTAs) is nothing but Orwellian Newspeak.
For FTAs are not the same as free trade, even though that is what most politicians and journalists believe. I sometimes amuse my audience by saying that politicians, fed on soundbites, cannot comprehend more than two words at one time and are therefore prone to equate "free trade areas" with "free trade." In fact, the great international economist Jacob Viner, the founding father of the theory of preferential trading arrangements introduced in his celebrated 1950 book, The Customs Union Issue, attributed the support the free traders of his time had for discriminatory freeing of trade to "an unreflecting association on their part of any removal or reduction in trade barriers with movement in the direction of free trade."(1)
The nature of FTAs is to offer free trade only to members, not to non-members. Thus, FTAs are two-faced: they ensure free trade for members and (relative) protection against non-members. First-year students of international economics would be asked to shift to a different field if they could not grasp this elementary and elemental distinction, and yet today's politicians imagine themselves to be statesmen endorsing free trade when they embrace these inherently discriminatory PTAs.
As PTAs proliferate, the main problem that arises is the accompanying proliferation of discrimination in market access and a whole maze of trade duties and barriers that vary among PTAs. I have called this outcome the "spaghetti bowl" phenomenon.(2) (I must confess that I once used this analogy in an after-dinner speech when the chairman was an Italian who did not quite share my difficulty in handling spaghetti and seemed genuinely puzzled!) Mr. David de Pury, a distinguished representative of the globalized private sector and the chief executive officer of ABB, Switzerland, is among the renowned executives who have expressed themselves in public fore precisely on this point and on the advantage, even the necessity, of having uniform nondiscriminatory rules and barriers.(3) I endorse this objective, which only multilateral WTO-sanctioned treaties make possible. In view of its importance, let me say a little more on this question.
I. THE SPAGHETTI BOWL: PROBLEMS WITH PREFERENTIAL TRADING ARRANGEMENTS
The spaghetti bowl proliferation of preferential trading arrangements clutters up trade with discriminatory focus on the "nationality" of goods, creating the inevitable costs that trade experts have long noted. In particular, consider the following points, some of which are relevant only for FTAS, others of which are more generally relevant.
Rules of origin, which are inherently arbitrary despite the extensive codifications that accompany them, multiply under FTAS because different members have different external tariffs. This makes the role of the lobbyist (who protects clients by fiddling first with the adoption of rules of origin and then with the estimates that underlie the application of these rules) and the customs officer (who can make money by assigning goods the origin suggested by those bearing gifts) immensely profitable at our expense.
More generally, it is increasingly arbitrary to operate a trade policy on the assumption that one can identify which product comes from which country. When I was a student at Oxford in the 1950s, there used to be a "Who's Whose" that listed the bondings (or "steady relationships," in our slang) among the undergraduates. …