Battle for free trade
S. L. RAO
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Overview of the international trading system which has spawned preferential deals
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TERMITES IN THE TRADING SYSTEM — How Preferential Agreements Undermine Free Trade: Jagdish Bhagwati; Oxford University Press, YMCA Library Building, Jai Singh Road, New Delhi-110001. Rs. 295.
Jagdish Bhagwati’s contributions to international trade theory and policy have many times brought him to the verge of the Nobel Prize. He has been at the forefront in the battle for free trade, globalisation and reduction of poverty, and for better use of global resources. He is Professor at Columbia University and for sometime was able to come “out of the ivory tower” when attached as Economic Policy Advisor to Arthur Dunkel, Director-General of the General Agreement on Tariffs and Trade (GATT). He is acknowledged as the foremost scholar on trade today.
This small book, enriched by the author’s anecdotes and witty asides, is essential but difficult reading for non-practitioners in international and Preferential Trade Agreements (PTAs).
The termites
At the end of the Second World War Keynes initially opposed the “most favoured nation” (MFN) clause. This would automatically extend to all members of the proposed new trade body (GATT), the lowest tariff extended to any member. Keynes’s intellectual flexibility led him soon to strongly support the MFN clause.
The world descended into preferences between countries in the 1930s, with “tit-for-tat protectionism and the competitive depreciations of currency…to divert limited world demand to one’s own goods.” Joan Robinson called them “beggar my neighbour” policies of mutually nullifying competitive currency depreciations. The GATT sought to make difficult uncoordinated free-for-all actions to raise trade barriers, resurrect multilateralism, primacy to restoring the MFN clause, and to ensure non-discrimination. Any exceptions to MFN were explicitly provided for. Article 24 made an exception for Free Trade Areas (FTAs) and Customs Unions. The FTAs were a mix of free trade and protection with external barriers on non-members left unchanged, freeing trade among members but increasing protection against non-members. They are the “termites” damaging global free trade.
Exemptions
The GATT had special exemptions for developing countries. The generalised system of preferences (GSP), a one-way preferential access to developing countries, enabled exemption to developing countries from obligations imposed by GATT membership. Since the early 1990s PTAs have proliferated. A few countries have joined several PTAs in a fit of “preferential promiscuity.”
The European Union (E.U.) increasingly entered into PTAs with non-E.U. countries, principally with former African colonies. The U.S. began with a political FTA with Israel. The U.S. continued with new PTAs even after it developed a new regional trading area through North American Free Trade Agreement (NAFTA). For example the PTAs with Latin American countries were entered into so that their clamour for debt relief could be diverted to preferential trade with the U.S. With the dollar seriously overvalued during the Reagan administration, even a free-trader President approved protectionist measures like voluntary export restraints for automobiles from Japan in 1981.
The developing countries started PTAs between themselves to minimise competition from developed countries, improve their bargaining power in trade negotiations, to imitate the PTA proliferators — the U.S. and the E.U.— and as bargaining chips during the multilateral Doha Round. Some countries like Singapore entered into PTAs with the U.S. to keep the U.S. involved in the region, to signal their commitment to economic reforms, to ensure their trade share that could get otherwise diverted to those who signed PTAs, or where lobbies in the U.S. pressed for PTAs as a means of getting concessions in trade unrelated areas from weaker countries. We now have crisscrossing PTAs —“the spaghetti bowl phenomenon.”
Trade preferences have become nonsensical in the modern age as companies source components from all over the world. Bhagwati illustrates the difficulty of identifying countries of origin today with a witticism on Princess Diana’s accidental death: “An English princess with an Egyptian boyfriend crashes in a French tunnel, driving a Dutch car with a German engine driven by a Belgian who was drunk on Scottish whisky, followed closely by Italian paparazzi, on Japanese motorcycles, treated by an American doctor, using Brazilian medicines.”
Unrelated demands
Bhagwati discusses how trade-unrelated demands are made on poor countries by the rich. Intellectual Property Rights (IPR) have to do with collecting royalties, not with trade, but the pharmaceutical and software lobbies managed to get the U.S. to insert IPR into the World Trade Organisation (WTO) in 1995. Labour and domestic environmental standards are not directly related to trade but get inserted into trade issues. However, PTAs of developing countries never include trade-unrelated issues.
The rich countries are unable to secure their interests in the WTO because of the votes of the many developing countries there. They do so by breaking away the developing countries one by one through PTAs. PTAs now exist among and between rich and poor countries for many reasons other than trade. They will not be wound up. If the world is to benefit from free trade the only way left is by using multilateral trade negotiations like the Doha Round to reduce the MFN tariffs to zero, thereby making preferential trade between countries of no benefit. Pursuing global MFN trade liberalisation could reduce the effect of trade preferences.
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