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Bilateral trade-off

Wall Street Journal Asia | September 5, 2008


Bilateral Trade-Off


The latest sign that the postwar era of "multilateral" trade liberalization has ended came last week in Singapore. The event was an Association of Southeast Asian Nations ministerial meeting, where the 10-member grouping and India formally agreed to a "free trade" deal to take effect in January. At the same meeting, Asean leaders also agreed to establish yet another so-called "free trade agreement," this one with Australia and New Zealand.

That brings to roughly 400 the number of regional and bilateral trade agreements that have been notified to the World Trade Organization. Meanwhile, another try to keep the Doha Round of world trade talks alive will be made in Geneva later this month. But the prospects are not bright, and all of this has been very predictable. Scores of observers — not only academics — have regularly warned that bilateral and regional trade pacts, which are in fact preferential rather than free trade agreements, are both a cause and a consequence of a breakdown of the WTO system.

East Asia has led the way in the recent proliferation of FTAs, though many would say that the United States itself broke the dam when it embarked on its path of "competitive liberalization." That process has seen Washington establish FTAs with Singapore, Australia, Chile and a group of Central American countries, on top of the North American agreement it negotiated in the early 1990s. Currently, the most prominent American effort is its still-to-be ratified agreement with South Korea. There are a number of others at various stages, including ongoing U.S. talks with Malaysia, Thailand and Peru, as well as early-stage FTA discussions with Indonesia.

Almost all of these "free trade" arrangements are partial-sector or "low quality" deals, and all fly in the face of a supposed WTO "rule," known as GATT’s Article 24. That rule allows for regional and bilateral trade agreements — so long as they cover "substantially all" trade among the partners. But that of course is not what is going on here, and it certainly does not apply to last week’s Asean-India FTA.

In that arrangement India’s Commerce Minister Kamal Nath played the hero. The Telegraph in Kolkata reported that Mr. Nath "persuaded Asean that India should not have to cut duties at all on 489 items, and only partially on 606." Moreover, any tea, coffee or pepper that originates in the Asean states will face sufficiently high Indian duties to assure that none gets through!

While Mr. Nath may be today’s Indian hero, that was hardly his image in other capitals during the now-stalled WTO negotiations earlier this summer. Along with Brazil’s Foreign Minister Celso Amorim, Mr. Nath had long insisted that a successful Doha Round would require severe European Union and U.S. cuts both in their agricultural subsidies and their farm-import restrictions. That posed high hurdles to Washington and Brussels, and EU Trade Commissioner Peter Mandelson was sharply criticized, especially in France, when he ultimately agreed to significant changes in EU agricultural policies.

Likewise in the U.S., where Trade Representative Susan Schwab needed to consult very closely with Congressional leaders to get their support for farm-sector reductions. To his credit, President George W. Bush then vetoed this year’s farm bill, precisely because of its high agricultural supports, though his veto was quickly overridden by a Congress heavily influenced by America’s always-powerful farm lobbies.

Those European and American domestic factors, and similar ones in India and Brazil, seemed at the time to be the main causes — along with the WTO’s unwieldy size — of the stalled Doha Round. But then Brazil gave its assent to the farm-sector cuts to which the U.S. and the EU had agreed, a development which appeared to leave only India standing in the way of a successful outcome.

That’s when China — which until this year and since its WTO accession had kept its head down in these negotiations — entered the fray. Allegedly acting as "spokesmen" for the WTO’s developing nations, though many of the poorest of the poor were decidedly unhappy with their "leader’s" decision, China joined with India to oppose a Doha deal. That Doha collapse seemingly set the stage for last week’s FTA announcements in Singapore, although Prime Minister Lee Hsien Loong dutifully reminded everybody that a "rules-based" global system is still the best way forward.

Were those India-Asean announcements in fact the inevitable consequence of the seeming Doha failure? Not quite. Instead, the desire for more "small-scale" deals might have been the cause of Doha’s failure. India appears to have decided its best option may be to bargain hard at smaller, bilateral, negotiating tables. The Telegraph reported that "when he became commerce minister," Mr. Nath set a goal of "60% of India’s foreign trade [that] would be covered by FTAs."

In that light, his intransigence in the Doha talks’ final hours did not grow primarily from his concern with the electoral power of India’s poor farmers. It grew instead from his belief, as the glowing Telegraph editorial put it earlier this week, that FTAs must be a core part of India’s trade policy: "He sabotaged the WTO negotiations because he was so intent on using India’s trade barriers as bargaining chips in negotiating FTAs."

Quite likely none of this could or would have happened had the U.S. retained its moral and political weight in the global economy and in world affairs more generally. It was, after all, the U.S., led by Secretary of State Cordell Hull in the 1930s and ’40s, which had insisted on the postwar multilateral trade system and kept it going through much of the postwar era. Hull’s cause was not only open trade as a path to many nations’ prosperity, but even more important as a key means by which to avoid future conflicts and wars.

That America is no more, at least on present indications. In this era, as former Treasury Secretary and Harvard President Lawrence Summers has recently reminded us, "much of the momentum in the global economy is coming from countries . . . pursuing economic strategies directed towards wealth accumulation and building up geopolitical strength rather than improving living standards for their populations."

From all this America has been distracted, and in the Asia-Pacific region in particular it has not paid attention to its own vital political interests. Indeed, as former Japanese Finance Minister and Prime Minister Ryutaro Hashimoto warned Henry Kissinger a decade ago, if America "expands NAFTA, blockading itself within the North and South American continents . . . we will be forced to focus on Japan as an Asia-Pacific nation . . . I hope you won’t push us that far." That in fact is what has transpired, as first Japan, then China, and now India, Asean and Australia, have each looked to their "own" interests.

Those are the implications and warning signs that emanated from last week’s "free trade" announcements in Singapore, and they must not be ignored. Yet from 2000 to 2007, even as the dollar-value of America’s global export growth more than doubled in those years, in the Asean region they grew by only 30%, and to Japan — amazingly — they declined. Those export-centered facts lend support to warnings by former Secretary of State James Baker and others that lines are being drawn "down the center of the Pacific" from which the U.S. is being excluded. Last week’s Singapore meetings show that troubling process continues.

Mr. Gordon is professor emeritus of political science at the University of New Hampshire. His most recent book is "America’s Trade Follies: Turning Economic Leadership into Strategic Weakness" (Routledge, 2001).

 source: WSJ