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Two-way deals fill free trade gap

Two-way deals fill free trade gap

Conrad de Aenlle IHT

Friday, October 01, 2004

LONDON - The early 1990s were giddy times for free traders. Twelve states cemented longstanding economic ties by forming the single European market; Nafta was established, eliminating tariffs in a zone stretching from the Arctic Circle to the Guatemalan border, and Mercosur created a similar arrangement among four South American nations.

As they reveled in their success, economic liberals predicted that the North American Free Trade Agreement would extend soon into South America, maybe all the way to Tierra del Fuego, and that commerce would flourish unfettered in similar blocs in Asia and elsewhere. As for the European Union’s single market, it was destined, they said, to reach the boundaries of the former Soviet Union.

Well, they got the last one right; the European Union grew to 15 countries and then to 25, including much of the erstwhile Warsaw Pact. But Nafta remains a club of three - the United States, Canada and Mexico - Mercosur is still Brazil, Argentina and their tiny neighbors Paraguay and Uruguay, and no other trade zones have been created.

Economists blame the flagging momentum on the American recession early in this decade, which fueled protectionist sentiment and made talk of expanding Nafta politically unwise. In South America, the far more severe slowdown in Argentina made widening Mercosur politically and economically problematic.

Protectionist verve limited the development of free trade zones, but so did a lack of it, said Jerome Booth, research director at Ashmore Investment Management in London, and an economist specializing in emerging markets. Booth says tariffs are so low already in Asia that little urgency can be mustered to widen multilateral trade arrangements.

Some economists and trade specialists nevertheless predict a second wind in the drive to expand free trade zones; others expect new trade deals as well, but with an emphasis on bilateral accords. It may seem as though a deal is a deal, but experts in the field differ on the relative merits of bilateral and regional agreements, with each having its friends and foes.

"There is certainly a lot going on," observed Stefano Bertasi, director of the department of policy and business practices at the International Chamber of Commerce. "Activity has picked up since the lull in the Doha round," he said, referring to a breakdown last year in the global trade talks that started in Doha, Qatar, in 2001. The global negotiations, led by the World Trade Organization, stalled at a conference in Cancun, Mexico, last September but took a small step forward again in August this year when negotiators agreed a framework for further talks. The August agreement, in Geneva, was hailed by WTO officials as a breakthrough. But skeptics warn that hugely complex and detailed bargaining lies ahead, and that momentum generated in Geneva risks being lost as a result of the November U.S. elections and the installation of a new European Commission in Brussels.

Bertasi meanwhile noted that more than 160 trade accords are in force around the world and the WTO expects 100 to 200 new ones by the end of next year - mostly bilateral deals, since these are the easiest to negotiate.

Bilateral pacts are especially attractive for large economic powers like the United States that can use their size and wealth for leverage when bargaining with almost any other country. They also risk less political fallout, trade specialists say; while Nafta has been a lightning rod for protectionists who blame it for the loss of American manufacturing jobs, bilateral deals operate on too small a scale to serve as fodder in a populist crusade.

"It’s easier to get what you want one country at a time, and opponents are fewer when you’re doing it one country at a time," said Kern Alexander, a lecturer in international economics at the University of Cambridge.

For these reasons, recent U.S. administrations have made bilateral accords the focus of their trade policies, to the detriment of global commerce overall, in Alexander’s opinion.

"There’s a problem with bilateral agreements," he said. "One between China and the U.S. might be good because both have bargaining power, but when the U.S. negotiates with Chile, say, the U.S. uses its power to get concessions, but it won’t give many in return."

While Alexander favors regional trade deals, other economists see drawbacks. Although a free trade area benefits participating countries, the gains may be partially canceled out when trade with the rest of the world is taken into account, they say.

"Countries within the zone are favored, but protectionism against others increases," said Raffaella Tenconi, an economist at Lombard Street Research, a London consultancy.

If international commerce were to coalesce around a handful of regional blocs, their existence would likely lead to harder negotiating positions in global talks, Tenconi warned.

It is hard for economists to show a clear preference between bilateral and regional trade accords because their impact is sometimes difficult to measure. Throw in the fact that the people doing the measuring are often political, business or labor leaders pushing an agenda, and it becomes more difficult still.

If a U.S. auto factory closes and another opens in Mexico, some constituencies are bound to blame Nafta. If a U.S. software maker hires workers to meet demand from Mexican businesses, it may chalk up the expansion to the superiority of its products.

"It’s harder to tell how your economy has gained" from a trade deal, Alexander said. "It’s easier to quantify costs."

In the end, to a pure free trader, there is something unsatisfying about both regional and bilateral deals, Booth, atAshmore, said.

"The more you liberalize on a multilateral level, the less need there is for bilateral or regional deals," said Bertasi, at the ICC. "Global talks are the first, best way to liberalize trade."

Conrad de Aenlle writes from London about business and investment

 source: IHT