Some Inherent Problems with Free Trade Agreements

By Palmeter, David | Law and Policy in International Business, Summer 1996 | Go to article overview

Some Inherent Problems with Free Trade Agreements


Palmeter, David, Law and Policy in International Business


Our memories are short, and too often the lessons of yesterday are lost on today. The current popularity of preferential economic arrangements, such as the North American Free Trade Agreement (NAFTA), is a case in point, an indication that the circumstances that led to adoption of the General Agreement on Tariffs and Trade (GATT) have been forgotten.

Adoption of GATT was driven by the existence of preferential trade regimes, and the order of the first two articles of the agreement reflects this focus.(1) GATT's core constitutional provisions are contained in its first three articles: Article I's most-favored-nation (MFN) requirement;(2) Article II's binding of protection at existing levels;(3) and Article III's national treatment requirement.(4) Under this arrangement, the two non-discrimination articles are interrupted by the tariff-binding article. Logically, however, GATT should begin with the agreement to hold protection at existing levels (Article II), then move to the MFN requirement (Article I), and then on to national treatment (Article III). The agreement's unconventional progression is largely due to the influence of the United States, which focused on non-discrimination as its overriding trade concern in the years leading up to the negotiation of GATT. When the United States eventually won this point, nondiscrimination--or MFN--was put at the head of the parade.(5)

The precise issue in GATT was not regionalism; it was the British Imperial Preference. But if regional and imperial preferences are not the same thing, they are close to it. Both are preferential (which is a polite way of saying both are discriminatory); both cater to insiders at the expense of outsiders; and both are inconsistent with the principle of MFN treatment.

Concern over discriminatory or preferential trade was not a new issue for the United States when the original GATT was drafted in 1947. The American Revolution was fought in part over the issue-that is, the British insistence that the colonies trade only with Britain and not with France.(6) Indeed, the Declaration of Independence condemns George III "for cutting off our trade with all parts of the world."(7) George Washington recommended a non-discriminatory trade policy to his countrymen in his famous Farewell Address.(8) Equality of trade was the third of Woodrow Wilson's Fourteen Points.(9) And the dismantling of the British Imperial Preference was a major goal of U.S. trade policy after the Ottawa Agreements of the 1930s.(10) Non-discriminatory multilateralism has been the icon before which U.S. trade policy has bowed for two centuries-but no longer. NAFTA raises the question of why the United States now embraces preferential trade arrangements.

One obvious reason for the United States' change of heart is that the world has changed. Many of the earlier discriminatory trading regimes had the practical effect of greatly choking off U.S. exports--making it no wonder that non-discrimination became a significant element of U.S. trade policy. Reductions in tariffs and the dismantling of colonial empires in the post-war era have reduced the significance of many preferences. Moreover, from the U.S. perspective, the European Community's preferential trading arrangements--not only with its European neighbors but also with some former colonies--provide, if not an incentive to do likewise, then at least support for the view that the United States should not be constrained from doing likewise.

Another reason for the move toward preferential arrangements is the "GATT-frustration" factor. In the early 1980s, when the United States began to embrace discriminatory arrangements, the multilateral system seemed sclerotic. Since multilateralism was hostage to the lowest common denominator, the argument went, countries interested in freer trade should move ahead bilaterally, letting the laggards catch up if they could.(11)

All of these reasons may have played a part in the abandonment by the United States of its strong multilateralist policy, but they do not explain the absence of debate on the issue. …

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